Yen, Dollar Rise on Rate Outlook, Gold Falls Most in 14 Months

Dec. 7 (Bloomberg) -- The yen strengthened and the dollar rose to its highest level in a month against the euro as investors weighed whether the world economy is recovering fast enough to warrant higher central bank interest rates. Gold headed for the steepest two-day retreat since October 2008.

The yen advanced against all 16 most-traded currencies tracked by Bloomberg at 12:13 p.m. in New York. The dollar gained versus 12. The MSCI Emerging Markets Index dropped for a second straight day as Dubai’s equity index plunged 5.8 percent to a four-month low. Gold fell 1.9 percent in New York, while crude oil dropped a fourth consecutive day. European equities fell, while the Standard & Poor’s 500 Index rallied.

Federal Reserve Chairman Ben Bernanke speaks today for the first time since the Dec. 4 U.S. employment report signaled a surprise drop in the jobless rate, stoking expectations the Fed may raise rates sooner than economists had anticipated. Investors are concerned banks may have to increase writedowns that have reached $1.7 trillion worldwide since the credit crunch began, as Dubai World seeks to delay payment on $26 billion of debt.

“Not only are commodities falling because of strength in the dollar, traders and investors are easing up on their inflation fears and on their hedges on the U.S. dollar,” said Kathy Lien, New York-based director of currency research with online currency trader GFT Forex. “One of the primary reasons why traders or investors have piled into gold is because of the belief that the Federal Reserve is going to be behind the curve on tightening monetary policy.”

Yen, Dollar Gain

The yen rose most against higher-yielding currencies, advancing 1.8 percent versus the New Zealand dollar. The U.S. dollar traded at its highest level since Nov. 4 versus the euro, extending gains made at the end of last week that followed the U.S. employment report.

Treasury two-year notes advanced on speculation Bernanke may try to damp optimism about the strength of the economic recovery in his speech today. The benchmark two-year note yield fell four basis points to 0.80 percent.

The U.S. lost 11,000 jobs in November, less than the 125,000 median forecast of 82 economists in a Bloomberg survey, the Labor Department said Dec. 4. Fed-funds futures contracts on the Chicago Board of Trade showed today a 16 percent probability the central bank will increase its benchmark overnight rate to at least 0.5 percent by March, up from 11 percent a week ago.

Gold futures for February delivery in New York extended their decline since Dec. 3 to 5.8 percent, falling to $1,147.90 an ounce as the Dollar Index’s advance curbed the metal’s appear as an alternative asset.

Four-Day Retreat

Crude oil futures slumped 1.5 percent and have now lost 5.2 percent since Dec. 1. The Reuters/Jefferies CRB Index of commodities declined for a fourth day, the longest losing streak since August.

The Dubai Financial Market General Index sank the most among benchmark equity indexes worldwide. The measure has tumbled 17 percent since Dubai announced on Nov. 25 that state- owned Dubai World would ask creditors for a “standstill” agreement on its debt, including property company Nakheel PJSC’s $3.5 billion bond due for repayment in a week.

Russia’s Micex Index dropped 1.5 percent as oil company OAO Rosneft sank on falling crude prices. South Africa’s FTSE/JSE Africa All Shares Index declined 0.9 percent, after gold producer AngloGold Ashanti Ltd. retreated 3.7 percent.

Europe, U.S. Stocks

The Dow Jones Stoxx 600 Index, the benchmark for European stocks, slumped 0.5 percent. Fresnillo Plc, the world’s largest primary silver producer, led basic-resources producers lower in London, losing 1.89 percent. Siemens AG, Europe’s biggest engineering company, slipped 1.6 percent in Frankfurt after Morgan Stanley cut its recommendation.

The S&P 500 rose 0.1 percent, adding to last week’s 1.3 percent advance. Cigna Corp. added 4.5 percent, leading gains among health-care companies, after Goldman Sachs lifted its industry rating to “attractive,” citing cheap shares and “limited downside risk under likely outcomes for health reform legislation.”