By Mari Murayama and Kanako Chiba
Tokyo, March 18 (Bloomberg) -- The dollar had its biggest gain in more than a week against the yen on expectations Federal Reserve officials meeting tomorrow will signal the U.S. economic recovery is gaining momentum.
The dollar rose 0.6 percent to 129.88 yen, the biggest gain since March 8. It also strengthened against the euro for the first time in a week, trading at 88.01 U.S. cents from 88.28.
There's ``optimism on the U.S. outlook, which will support the dollar,'' said Atsushi Komatsu, deputy general manager of international treasury at Fuji Bank Ltd.
Japanese life insurers and fund managers are also planning to move money overseas when the business year begins next month, helping send the U.S. currency higher versus the yen.
The dollar rally comes after reports showed U.S. consumer confidence rose in March to its highest level in 15 months and factories increased production in February. The figures spurred expectations the Fed will decide that the economy no longer faces a bigger risk from slower growth than from inflation.
A report on Philadelphia-area manufacturing Friday will probably show a third month of expansion, analysts said.
Fed policy makers have for the past 15 months said weakness is a greater risk. Now they'll probably state the risks facing the economy are balanced between faster inflation and weakening growth, Laurence Meyer, a former Fed governor, said last week.
Fed
The central bank may raise its target for overnight bank lending to 3 percent by the end of the year from 1.75 percent now, with the first quarter-point increase coming at its June 25-26 meeting, Meyer said. Economists at 14 of the 22 primary dealers, firms that trade with the Fed, said in a Bloomberg survey that policy makers at Tuesday's meeting will adopt a neutral stance.
Fed Chairman Alan Greenspan has said the U.S. is starting to emerge from a recession that began a year ago.
The Fed's decision last year to drive the U.S. benchmark rate to a 40-year low of 1.75 percent helped buoy the dollar by fueling expectations U.S. growth would recover more quickly than other economies, analysts said.
Not everyone says higher interest rates will help the dollar because they will increase companies' borrowing costs and could slow the economic recovery.
``A trend for higher interest rates could hamper U.S. stocks, and that would be negative for the dollar,'' said Yoshihiko Kobayashi, principal of foreign exchange sales at Bank of America in Tokyo. Signals the Fed will raise interest rates soon may also reduce the attractiveness of U.S. bonds, which could hurt the dollar, said Eiji Utsunomiya, treasury vice president at Sumitomo Mitsui Banking Corp. in New York.
Yields on the two-year note, the Treasury note most sensitive to Fed rate changes, have climbed 67 basis points the past six weeks to 3.58 percent, one basis point below a six-month high, as investors have driven down its price.
New Fiscal Year
Japanese fund managers said they may buy U.S. assets once the next fiscal year begins on April 1.
``The dollar may tend to rise on expectation Japanese investors will start increasing overseas investment,'' said Yasuharu Tsuru, a foreign exchange manager at Mitsubishi Trust & Banking Corp.
Sumitomo Life Insurance Co. is among the companies considering adding to its overseas bond holdings. ``While yields are rising, U.S. bonds are still more attractive than Japanese bonds,'' said Michihisa Tanimoto, general manager of the fixed-income department at Sumitomo Life Insurance Co., Japan's third-largest lifer.
There's also speculation Japan's biggest government-run pension fund would start buying non-Japanese bonds this week, said Masamichi Nomura, head of foreign exchange trading at BNP Paribas SA. The Public Pension Fund will raise its allocation to overseas bonds to 8 percent from 5 percent in the new fiscal year, signaling purchases of about 1.5 trillion yen ($11.6 billion).
In other trading, the dollar rose to 1.6613 Swiss francs from 1.6562 francs and to $1.4222 per the British pound from $1.4248 Friday.