By Matthew Brown and Ron Harui Dec. 30 (Bloomberg) -- The dollar climbed to a two-month high against the yen on speculation the Federal Reserve will withdraw stimulus measures as the economy recovers, pushing market interest rates higher. The dollar rose versus the euro, set for its first monthly advance since June, before a report economists said will show companies in the U.S. expanded in December for a third consecutive month. Currencies of raw-material producers including the Canadian and Australian dollars weakened as commodity companies led declines by stocks. “Dollar-yen has been quite highly correlated with long- term interest-rate differentials, so with U.S. long-term yields picking up that’s been good news for the dollar,” said Paul Robinson, a currency strategist at Barclays Capital in London. The dollar bought 92.26 yen as of 6:59 a.m. in New York, from 92 yesterday. It touched 92.28, the highest level since Oct. 27. The dollar appreciated to $1.4325 per euro, from $1.4354. It earlier reached $1.4307, the strongest since Dec. 23. The euro was at 132.18 yen, from 132.05 yen. The Canadian dollar dropped 0.5 percent to C$1.0488 per U.S. dollar, and the Australian currency weakened 0.1 percent to 89.37 U.S. cents. The MSCI World Index fell 0.5 percent, with the materials sub-index declining 1 percent, the biggest drop among the 10 groups that make up the benchmark stock gauge. The dollar has appreciated 4.6 percent versus the euro this month, trimming its 2009 decline to 2.6 percent. The greenback has fallen 30 percent against the euro in the past 10 years. U.S. Manufacturing The Institute for Supply Management-Chicago Inc. business barometer may have eased to 55.1 from a one-year high of 56.1 in November, according to the median estimate of 53 economists surveyed by Bloomberg News. Readings above 50 signal expansion. The dollar rose as the yield premium offered by 10-year Treasury notes over similar-maturity Japanese bonds stayed near the widest in more than two years, making U.S. debt more appealing than Japan’s securities. It reached 2.53 percentage points on Dec. 24, the highest level since December 2007 based on closing prices, and was at 2.50 percentage points today. “The dollar continues to be bought back as Treasury yields hold at high levels,” said Toshihiko Sakai, head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “Outlooks between the Fed and the BOJ are diverging, boosting demand for the dollar-yen.” Rate Bets There is a 58 percent probability that the Fed will raise interest rates by its June 23 meeting, according to Fed Funds futures contracts on the Chicago Board of Trade, up from 48 percent yesterday and 31 percent a month ago. Demand for the yen waned as Reuters reported that Standard & Poor’s said Japan’s AA credit rating could be threatened if policies fail to stabilize and gradually reduce the nation’s huge debt burden. S&P is focusing on Japan’s medium-term fiscal trajectory and the feasibility of the government’s policy for fiscal consolidation, Takahira Ogawa, director for sovereign ratings at S&P in Singapore, said on Dec. 15. The deteriorating trend for Japan’s credit quality doesn’t warrant a change in the nation’s rating outlook or a downgrade, he said. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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