Dollar posts another gain against euro, yen

The dollar had its third straight quarterly gain against the euro and the yen, the longest winning streak since 2001, as the Federal Reserve stuck to its policy of ''measured" increases in interest rates.

The dollar rose 2.3 percent against the yen since the end of June and 0.8 percent versus Europe's currency. The yield advantage of Treasury notes over European government debt widened this quarter to the most in more than six years as the Fed said the US economy faces only a ''near-term" setback after Hurricane Katrina.

''High-yielding currencies are well supported, and the US dollar belongs to this family of high-yielding currencies," said Hans Guenter Redeker, head of currency strategy at BNP Paribas SA in London. ''Interest-rate differentials are playing a role."

The dollar strengthened to 113.51 yen at 4 p.m. Friday in New York from 113.01 late Thursday, according to currency-dealing system EBS.

The yen had its third weekly drop against the dollar, losing 1 percent. The US currency traded at $1.2020 per euro, from $1.2031, gaining 0.2 percent last week.

Redeker expects the dollar to rally to 115 yen and $1.17 per euro by year-end.

''The Fed has given all impressions that they intend to keep raising rates," said Tim Mazanec, senior currency strategist in Boston at Investors Bank & Trust Co. ''That has spurred interest in the dollar."

The yield advantage of 10-year US Treasury notes over German government bonds with a similar maturity is 1.19 percentage points, near the widest since July 1999. Versus Japanese government bonds, the spread is 2.84 percentage points.

The gap with Japan has averaged 2.87 percentage points this year and reached as much as 3.27 percentage points on March 28.

''Japanese investors are buying the dollar to purchase overseas assets, such as Treasuries," said Luke Waddington, head of interbank currency sales at Royal Bank of Scotland PLC in Tokyo.

Japanese investment abroad is being led by a surge in purchases of foreign bonds. Japan's investors, including the central bank, held $683 billion of Treasuries in July, more than any other country, and they were net buyers of foreign bonds for all but two weeks this quarter, according to US Treasury Department figures.

Japan's industrial production rose 1.2 percent in August, compared with a median forecast of 1.8 percent in a Bloomberg News survey of 34 economists, a government report showed Friday.

Spending by Japanese households headed by a salaried worker rose 3.2 percent in August, compared with a median forecast of 4 percent in a separate survey. Unemployment held at 4.3 percent.

Fed policy makers on Sept. 20 lifted the US interest-rate target for the 11th straight time, to 3.75 percent, and said further increases were likely.

The Bank of Japan has kept rates near zero since 2001.

Rate increases have helped spur an 11 percent gain in the dollar vs. the yen and a 13 percent rally against the euro this year.

''It really is a US dollar story," said Clifford Bennett, chief strategist in Sydney at FxMax. The Fed will lift rates to 4 percent at its meeting on Nov. 1, he said.

The yen may be supported after Bank of Japan governor Toshihiko Fukui said Thursday that the central bank might stop pumping money into the economy as soon as April and forecast inflation may return after a seven-year absence.

Fukui's remarks in Osaka were the first time a BOJ official has indicated a timetable for ending its policy of holding interest rates near zero.