May 30 (Bloomberg) -- The dollar headed for a second monthly advance against the yen and euro as rising stocks and declining crude oil brightened the outlook for the U.S. economy, the world's biggest oil importer.
The U.S. currency traded near a three-month high versus the yen as traders increased bets the Federal Reserve will raise interest rates later this year. The yen fell against the New Zealand dollar and the Brazilian real, favorites of so-called carry trades, as a rally in stocks encouraged investors to boost holdings of higher-yielding assets funded in Japan's currency.
``The dollar looks strong,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital, the U.K.'s third-biggest bank. ``With the market turmoil calming down, people are focusing on inflation risks. Falling oil prices are positive for U.S. growth, bringing some relief to people.''
The dollar traded at 105.44 yen at 1:15 p.m. in Tokyo, from 105.50 yen in New York yesterday, when it reached 105.87, the highest since Feb. 28. The U.S. currency traded at $1.5521 per euro, from $1.5519 yesterday, when it touched $1.5486, the strongest level since May 19. The euro traded at 163.66 yen from 163.71 yen yesterday and 162.36 a month ago.
The dollar is heading for a 1.5 percent gain against the yen and a 0.7 percent advance versus the euro this month. The U.S. currency may reach 106.20 yen and $1.5450 a euro today, Ogawa forecast.
Carry Trades
The yen fell 1.3 percent to 82.31 per New Zealand's currency and 2.9 percent to 64.3922 versus the Brazilian real. It also traded at 100.75 per Australian dollar from 100.80 in New York yesterday, when it fell to 101.08, the lowest since Nov. 14, as the MSCI Asia Pacific Index of regional shares advanced for a second day.
``With investors' risk appetite improving, the yen is highly likely to weaken against major currencies across the board,'' Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader, wrote in a research note today. Japan's currency may fall to 107 per dollar in one month, Fukaya forecast.
In a carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is currency market moves erase those profits.
Japan's benchmark rate of 0.5 percent is the lowest among major economies. Government reports today showed Japan's consumer-price inflation slowed to a 0.9 percent pace in April and job vacancies fell to a three-year low. The central bank rate is 4 percent in Europe, 2 percent in the U.S., 7.25 percent in Australia, 8.25 percent in New Zealand and 11.75 percent in Brazil.
Yield Spread
The yield advantage on two-year Treasuries over similar- maturity Japanese government debt was about 1.8 percentage points, close to the widest since January. The gap between the yields fell below 1 percentage point in March.
The correlation between the dollar-yen rate and two-year Treasury note yields was 0.97 in the past year.
The dollar may extend gains to a three-month high of 108.62 yen should it close above so-called resistance at 105.70 yen, according to Citigroup Global Markets Inc., a unit of Citigroup Inc., the biggest U.S. bank.
Resistance at 105.70 yen represents the May 2 high, according to a Citigroup research note published yesterday. Resistance is where sell orders may be clustered.
Fed Outlook
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, climbed 0.7 percent to 72.994 this month, following a 1.2 percent rise in April. The U.S. currency traded at $1.9765 against the British pound from $1.9766 yesterday and was at 1.0483 versus the Swiss franc from 1.0494.
Futures on the Chicago Board of Trade show a 34 percent chance the Fed will raise its target rate by a quarter- percentage point to 2.25 percent on Sept. 16, up from 26 percent a month ago.
Crude oil for July delivery fell 0.4 percent to $126.08 a barrel after declining more than $4 a barrel yesterday, the biggest drop since March. The price has doubled from a year ago.
The correlation coefficient between oil and the euro-dollar exchange rate was 0.94 for the past year, indicating the two tend to move in the same direction, Bloomberg data show. A reading of 1 signals they move in lockstep.
European Inflation
The euro was poised for its second straight monthly advance versus the yen on speculation the 15 countries that share the currency are strong enough to withstand a slowdown in the U.S., allowing the European Central Bank to keep interest rates on hold to fight inflation.
A report today will probably show consumer prices in the euro region rose 3.5 percent in May, faster than the 3.3 percent gain in April, according to a Bloomberg survey.
``With the euro-dollar trading fixated by oil prices, stronger-than-expected consumer prices in the euro zone will likely lead to a rebound in the euro,'' Masafumi Yamamoto, head of foreign-exchange strategy in Tokyo at Royal Bank of Scotland and a former Bank of Japan currency trader, wrote in a research note today. The euro may rise to $1.63 by Sept. 30, he wrote.
To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
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