April 29 (Bloomberg) -- The dollar strengthened to a three- week high against the euro on speculation the Federal Reserve will signal that it's done lowering interest rates.
The currency is headed for its first monthly advance against the euro this year, and also gained versus the Norwegian krone and pound today, as interest-rate futures show the Fed may lower borrowing costs tomorrow and then pause. The yen increased against all of the major currencies as a drop in stocks encouraged investors to sell higher-yielding assets.
``If the Fed is not at the end of the easing cycle, it's near the end,'' said Jeff Gladstein, global head of foreign- exchange trading at AIG Financial Products in Wilton, Connecticut. ``I don't think the dollar will strengthen aggressively by any stretch, but I do think it's trying to bottom.''
The dollar rose 0.4 percent to $1.5601 per euro at 11:51 a.m. in New York, from $1.5657 yesterday. It touched $1.5541, the strongest level since April 3. The yen increased 0.7 percent to 103.43 against the dollar, from 104.19 yesterday. It advanced 1.1 percent to 161.35 versus the euro, from 163.11.
The U.S. currency has risen 3.8 percent against the yen and 1.2 percent versus the euro this month. The dollar fell to $1.6019 against the euro on April 22, the lowest level since the European currency debuted in 1999. The euro is up 2.5 percent versus the yen in April.
Futures on the Chicago Board of Trade show an 82 percent chance the Fed will cut the target rate for overnight lending by a quarter-percentage point to 2 percent tomorrow and 71 percent odds that the rate will be held at that level in June.
Yen's Advance
The yen rose 2.1 percent against the New Zealand dollar and 1.7 percent versus the pound as the drop in stocks led investors to reduce carry trades in which they get funds in a country with low borrowing costs and purchase assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 8.25 percent in New Zealand and 5 percent in the U.K.
Higher-yielding assets such as stocks were less attractive before the Fed's decision on interest rates tomorrow and the release of economic reports on gross domestic product and payrolls later this week, according to Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.
``There is perhaps still a little more value in the safe havens,'' said Osborne. ``The markets are perhaps worried about equities fading again in May if we get weak GDP and payrolls.''
The Standard & Poor's 500 Index dropped 0.4 percent.
New Zealand Dollar
New Zealand's dollar weakened against all of the major currencies after a government report showed the annual trade deficit unexpectedly widened in March. The kiwi declined 1.4 percent to 77.52 U.S. cents after touching 77.27, the lowest level since Jan. 28.
Australia's dollar dropped 0.5 percent to 93.38 U.S. cents after the New York-based Conference Board's Australian index of leading economic indicators fell in February for a third month.
The pound was poised for its biggest monthly decline against the dollar in 2008 after the Bank of England reported that mortgage approvals fell in March to the lowest in at least nine years. Sterling dropped 0.9 percent to $1.9735 per dollar. The dollar rose 0.8 percent to 5.1297 versus Norway's krone.
The euro was under pressure as the Bloomberg purchasing managers index showed today that European retail sales dropped the most in more than four years in April. Another report showed that French consumer confidence dropped this month to a record low as accelerating inflation squeezed incomes.
Slowdown `Spreading'
``The slowdown in the U.S. is spreading to other countries,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The dollar, which has been on its knees, is in a short-term bottoming process.''
Investors should sell the euro against the dollar over the next several weeks because two-year German bunds have lost some of their yield advantage over comparable-maturity Treasuries, said Citigroup Inc., one of the 10 biggest currency traders. The yield difference, or spread, between the two securities has decreased to 1.46 percentage points, from 1.85 on March 31, the most since the euro was launched.
European Central Bank policy makers have held the main refinancing rate at a six-year high of 4 percent since June to contain inflation. The U.S. central bank has cut its fed funds target 3 percentage points to 2.25 percent since September.
``The weak economic data looks increasingly out of the step with the ECB's hawkish stance,'' said Todd Elmer, currency strategist at Citigroup Global Markets in New York. ``It's a more benign environment for the U.S. dollar.''
Gains in the dollar may stall at 106.60 yen, said Masashi Kurabe, head of currency sales and trading at Bank of Tokyo- Mitsubishi UFJ Ltd. in Hong Kong, citing charts that traders use to predict price movements. The resistance level for the dollar is a 38.2 percent reversal of its decline to a low of 95.76 yen on March 17 from a high of 124.13 yen on June 22, based on the Fibonacci series of numbers. Resistance is a level where sellers may outnumber buyers.
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