By Bo Nielsen and Ye Xie Oct. 16 (Bloomberg) -- The dollar advanced from almost a 14-month low against the euro after some investors bet that the currency’s four-day decline to that level was overstated given signs of a U.S. economic recovery. The Dollar Index pared a second straight weekly drop after a Federal Reserve report showed U.S. industrial output expanded last month more than three times as much as economists forecast. The pound headed for its biggest weekly gains versus the euro and the dollar in four months on speculation the Bank of England will suspend quantitative easing. “The U.S. dollar is trading better on better news now,” said Adam Cole, head of global currency strategy at RBC Capital Markets in London. The dollar strengthened 0.5 percent to $1.4873 per euro at 9:18 a.m. in New York, from $1.4947 yesterday, when it depreciated to $1.4968, the weakest level since Aug. 13, 2008. The U.S. currency advanced 0.8 percent to 91.24 yen, from 90.55. The euro rose 0.3 percent to 135.68 yen, from 135.35. Output at U.S. factories, mines and utilities increased 0.7 percent in September, the Federal Reserve reported today. The median forecast of 77 economists in a Bloomberg survey was for an advance of 0.2 percent. International demand for long-term U.S. financial assets strengthened in August as Japan increased its holdings and investors accumulated Treasuries for a third straight month, a government report showed today. Net Buying Net buying of long-term equities, notes and bonds totaled $28.6 billion for the month, compared with net buying of $15.3 billion in July, the Treasury Department announced in Washington. Including short-term securities such as stock swaps, foreigners bought a net $10.2 billion in August, compared with net selling of $107.7 billion the previous month. The pound advanced for a fourth day against the dollar after the Financial Times reported yesterday that Bank of England Markets Director Paul Fisher said policy makers would be more likely to suspend asset purchases, giving themselves the option of “doing more later.” Rising asset prices and improved confidence may signal the program is working, BOE Deputy Governor Charles Bean said this week. “If the pound can bounce, then we must be wary that the dollar can also do so,” Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney, wrote today in a report. “The dollar has become oversold. The bounce in the former increases the risk of a broad bounce in the dollar, even if it may only be a short-term reprieve.” Stronger Sterling Sterling climbed to $1.6342, from $1.6268 yesterday, on course for its biggest weekly advance since May 22. It also strengthened to 91.17 pence per euro, from 91.86. The pound is “undervalued” as the currency market is underestimating the potential for rate increases by the Bank of England, according to Deutsche Bank AG, the world’s biggest currency trader. Benchmark rates in the U.K., Sweden and Switzerland will advance further than those implied by market prices for the countries’ currencies, based on the Taylor rule, Deutsche Bank said. The Taylor rule accesses a country’s interest-rate prospects based on inflation and unemployment. “We find that the U.K. clearly stands out, with the market underpricing rate hikes relative to the Taylor rule,” currency strategists Bilal Hafeez and Henrik Gullberg in London wrote in a research note to clients. Dollar Index The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, climbed as much as 0.6 percent to 75.904, a three-day high. The index was still on course for a second weekly drop and is down 7 percent in 2009. The yen headed for a second weekly loss versus the euro and was the worst performer against the dollar in the last five days among the 16 most-traded currencies tracked by Bloomberg as some investors doubted the Japanese government will support a stronger currency. Finance Minister Hirohisa Fujii said in Osaka yesterday governments are responsible for ensuring the stability of their currencies, which “need to reflect the strength” of economies. “The shift in Japanese currency policy has broken the relationship between the yen and risk, but the boost to sentiment already looks to be fading,” Todd Elmer, a currency strategist at Citigroup Inc. in New York, wrote in a note yesterday. “The erosion of support from official rhetoric on the exchange rate should leave the yen more vulnerable to negative underlying fundamentals and a potential acceleration in capital outflows.” The yen traded at 83.33 per Australian dollar after touching 84.22, the weakest level since October 2008. The dollar reversed losses against the euro as the European currency’s 14-day stochastic oscillator touched 91.9 today from 69.1 a week earlier, above the 80 threshold that signals the euro may have risen too quickly. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

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