By Yasuhiko Seki Dec. 22 (Bloomberg) -- The dollar traded near the strongest level in more than three months against the euro on speculation the Federal Reserve will withdraw stimulus earlier than expected on signs the U.S. economic recovery is gaining momentum. The greenback reached the highest in more than a month against the yen before reports this week forecast to show increases in U.S. personal spending and home sales. The Japanese currency fell after Bank of Japan Governor Masaaki Shirakawa said he will “persistently” keep policy rates at “virtually zero,” and as the difference between U.S. and Japanese bond yields reached the widest in more than a year. “With the U.S. economy beginning to see a self-sustained recovery, people now feel there’s increased likelihood for a rate hike,” said Yuji Kameoka, senior economist in Tokyo at the Daiwa Institute of Research Ltd. “The dollar is now entering a rising trend, shifting away from a prolonged downtrend.” The U.S. currency was at $1.4293 per euro at 1:31 p.m. in Tokyo from $1.4275 in New York yesterday. It earlier touched $1.4266, close to the three-month high of $1.4262 reached on Dec. 18. The dollar was at 91.37 yen from 91.17 yen yesterday after earlier reaching 91.48 yen, the highest level since Oct. 30. The yen was at 130.61 per euro from 130.18. U.S. personal spending probably rose 0.7 percent in November for a second month, according to the median estimate of economists in a Bloomberg survey before the Commerce Department report due tomorrow. Combined sales of new and existing homes last month may have reached the highest level since May 2007, other figures may show. Dollar Index The Dollar Index gained 0.4 percent to reach 78.142 yesterday, near its three-month high of 78.141 set on Dec. 18. The index was little changed at 78.049 today. “While trading leads suggest sustained gains in the dollar, the U.S. currency looks vulnerable to selling pressure in the near term, as technical charts are now signaling that the rebound was too fast,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. The Dollar Index’s 14-day relative strength index, or RSI, climbed above 70 yesterday, a sign the currency may be poised to fall after gaining rapidly. Futures trading in Chicago indicated a 46 percent chance that the Fed will increase its target rate for overnight lending between banks, currently between zero and 0.25 percent, by at least a quarter-percentage point by the June meeting, up from a 32 percent likelihood a month ago. Yield Gap The Fed began using Treasuries and agency debt in reverse repurchase agreements this month to test a mechanism for unwinding unprecedented monetary stimulus, removing a total of $990 million in cash from the banking system in five operations since Dec. 3. Adding to the dollar’s momentum, the premium offered by yields on U.S. debt over Japanese bonds reached 250.3 basis points today in Tokyo, the largest in more than a year. “Widening yield gaps are now favoring the dollar,” said Minoru Shioiri, chief manager of foreign-exchange trading at Mitsubishi UFJ Securities Co. in Tokyo. Bank of Japan Governor Shirakawa said yesterday the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation. Franc Appreciation The central bank unveiled a 10 trillion-yen ($11 billion) lending program three weeks ago after government officials urged it to do more to combat deflation in the world’s second-largest economy. “The recent series of comments from the BOJ and Shirakawa clearly suggest we won’t see an exit from easing measures in the foreseeable future,” said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest bank. “People now feel safe to sell the yen.” The Swiss franc may extend its advance against the euro amid speculation the Swiss National Bank has relaxed its resistance to gains in the currency. The franc touched 1.4850 yesterday, the strongest level since March 12, when the SNB bought foreign currency to weaken the franc and support the economic recovery. “It now seems to be appropriate to assume that central banks that seek to withdraw stimulus measures also need to accept the appreciation of their own currency,” Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd. The Swiss currency was at 1.4941 per euro from the 1.4938 close yesterday. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Source