Dollar gains against the euro

THE dollar posted its biggest weekly gain against the euro since November, and rose versus the yen, on renewed speculation the Federal Reserve will boost interest rates twice more this year.

The Fed has raised rates 14 times since June 2004, to 4.5%, and sets borrowing costs next on March 28. After Fed Chairman Ben Bernanke said this week the US economic outlook is “positive”, traders increased bets policy makers will lift the benchmark to 5% within two months.

“It’s reasonably clear that the dollar should trade up provided we don’t have a fundamental change’ in Fed policy, said Jason Bonanca, a currency strategist at Credit Suisse in New York.

The US currency gained 1.3% last week to $1.2035 per euro in New York, for the largest weekly gain since a 2.2% rally the week ended November 4. The dollar recovered from last week’s steepest loss in two months after Bernanke’s speech on March 20 to the Economic Club of New York.

US prices paid to producers, excluding food and energy, rose 0.3% last month, three times the median forecast of economists surveyed by Bloomberg, government statistics showed this week. Overall prices fell 1.4%, the government said.

Interest-rate futures show traders added back bets the Fed will lift the benchmark rate to 5% in May this week. Traders have fully priced in an increase in the benchmark to 4.75% next week.

“There was a lot of speculation last week about the end of rate hikes,” said Antje Praefcke, a currency strategist at Commerzbank in Frankfurt. “Now we’ve come back to what I would call normal expectations and that has supported the dollar.”

Citigroup Inc, the biggest US bank, scaled back its forecasts last week for how low the dollar will fall this year. The dollar will end the year at $1.28 per euro, the lowest since May 2005, instead of Citigroup’s previous forecast of $1.36.