May 11 (Bloomberg) -- The dollar rose the most against the yen in six weeks and gained versus the euro as the U.S. Treasury stopped short of saying China manipulates its currency and the Federal Reserve suggested it may keep raising interest rates.
The Treasury yesterday left China off a list of countries accused of currency manipulation, two weeks after the Group of Seven industrial nations urged Asian countries to let their currencies trade more freely. The Fed yesterday increased its benchmark rate to 5 percent and said ``further policy firming may yet be needed.''
``The Treasury report was a touch softer in its language than might have been expected, and the Fed decision left open the possibility of more rate hikes,'' said Simon Derrick, chief currency strategist at Bank of New York in London. ``There's no way you can look at this and say it's not been dollar bullish.''
The U.S. currency rose to 111.25 yen at 10:50 a.m. in London from 110.49 in late New York yesterday, when it fell to the lowest since Sept. 14. Against the euro, it bought $1.2720 from $1.2784, after reaching $1.2833, the weakest since May 11, 2005.
Asian central banks may seek to limit currency gains to prevent their goods becoming more expensive in export markets. The U.S. dollar today advanced against 12 of the 15 Asian currencies Bloomberg tracks. Had the Treasury report branded China a manipulator, that might have fueled U.S. calls for sanctions against China.
`Excessively Weak'
``With the Treasury refraining from naming China a manipulator, it means U.S. officials aren't pursuing an excessively weak dollar policy,'' said Adrian Foster, a currency strategist at Dresdner Kleinwort Wasserstein in Singapore.
American lawmakers blame China for the $201.6 billion U.S. trade deficit with the Asian nation last year, which was driven partly by a flood of Chinese goods into the world's biggest economy. China has shown ``far too little progress'' in making its exchange rate more flexible, the Treasury said in its report.
A stronger yuan would make Chinese goods less competitive against those of its Asian rivals. It would also increase the purchasing power of Chinese consumers for neighboring countries' exports, increasing demand for Japanese, South Korean and Australian goods and the currencies needed to buy them.
``It continues this moderate push on the Chinese authorities to allow more flexibility,'' said Adam Cole, senior currency strategist in London at RBC Capital Markets. ``The pace of change will be progressive and slow.''
Reserve Holdings
Central banks in some Asian countries buy dollars and sell their own currencies to help slow gains, adding to foreign- exchange holdings. China's reserves surged 33 percent to $875.1 billion at the end of March from a year earlier and those of South Korea and Taiwan are at records.
The Fed lifted rates for a 16th consecutive time yesterday to 5 percent. The European Central Bank has lifted borrowing costs twice since December to 2.5 percent and the Bank of Japan has kept borrowing costs near zero percent since March 2001.
Losses for the euro may be limited as economic growth in the euro region accelerated in the first three months of the year, reinforcing expectations the ECB will raise rates next month.
The $10 trillion economy expanded 0.6 percent in the first quarter from the last three months of 2005 when it grew 0.3 percent, according to a report. Futures show traders expect the ECB to lift rates at least three more times this year to 3.25 percent, starting with next month's meeting.
Retail Sales
The dollar also rose on expectations a government report will show faster retail-sales growth, bolstering the case for the Fed to add to yesterday's rate increase.
Sales rose 0.8 percent in April after gaining 0.6 percent the prior month, according to the median estimate in a Bloomberg News survey of 74 economists before today's report from the Commerce Department. Excluding auto dealers, sales are forecast to rise 0.9 percent, more than double the gain in March.
``The consumer I think is in better shape than many people believe,'' Tim Mazanec, senior currency strategist at Investors Bank & Trust Co., said in Boston.
U.S. interest-rate futures show traders are now pricing in a 40 percent chance of the Fed rate increase at a June 29 meeting, up from 32 percent on May 1.
The dollar also gained against the yen after Vice Finance Minister Koichi Hosokawa said Japan is ready to take action on foreign exchange rates if needed, a day after the yen rose to an eight-month high. He told a press conference in Tokyo that the authorities will ``take appropriate action on foreign exchange rates if needed.''
Trade Deficit
Gains in the dollar may be limited by speculation a U.S. government report tomorrow will show the world's biggest economy continues to run a near-record trade deficit.
The shortfall signals the U.S. requires more foreign exchange to pay for imports than dollars received for exports.
The Commerce Department will say the trade deficit was $67 billion in March, the third largest on record, up from $65.7 billion, according to a median estimate of 69 economists surveyed by Bloomberg News.
``The U.S. trade deficit argument is a concern for the dollar,'' said Hiroyasu Hirayama, head of foreign-exchange at BNP Paribas in Tokyo. ``This will especially weigh on the dollar.''
-- With reporting by Kosuke Goto in Tokyo, Ron Harui in Singapore and Susan Li in Hong Kong. Editor: Cunningham.
