Jan. 3 (Bloomberg) -- The euro rose the most against the dollar in three weeks on speculation U.S. Federal Reserve minutes will signal the central bank is moving closer to halting an 18-month policy of raising interest rates.

The 12-nation currency gained as reports today showed European manufacturing accelerated and German unemployment fell the most in 15 years, adding to speculation the European Central Bank will increase rates. The yield premium on U.S. assets helped propel the dollar to a 14.4 percent advance last year.

``The Fed is close to the end of its rate hike cycle while the ECB is just beginning, which removes support for the dollar,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt.

The euro gained 0.9 percent to $1.1926 per euro at 9:45 a.m. in New York, from $1.1820 late yesterday, for the biggest daily increase since Dec. 12. The dollar declined to 117.14 yen from 117.88, the biggest drop in nine days. The dollar climbed 14.7 percent against Japan's currency last year.

Fritsch expects the dollar to retreat to $1.24 per euro and 109 yen by the end of the year.

The Fed issues minutes today for the Dec. 13 meeting at which it stopped saying rates were at a level that would stimulate growth, a sign it is nearer to a change in policy. The dollar fell the most in six years against the yen that week.

`Likely to Be Dashed'

Fed policy makers lifted rates to 4.25 percent last month, the 13th consecutive increase since June 2004. The ECB raised its benchmark for the first time in five years last month, to 2.25 percent, while the Bank of Japan kept rates near zero percent since 2001.

``Any thoughts that the Fed may end the tightening process are likely to be dashed and that will probably support the dollar,'' said Steve Barrow, chief currency strategist at Bear Stearns Cos. in London.

Bear Stearns predicts the Fed will lift its target rate three more times this year, to 5 percent. Barrow said the dollar may strengthen to $1.10 per euro in the next few months.

Sixty-one percent of 46 traders, strategists and investors surveyed Dec. 29 and Dec. 30 from Sydney to New York advised buying the dollar against the yen this week. About 52 percent recommended purchasing the U.S. currency versus the euro.

European Economy

Interest-rate futures show expectations the ECB will raise rates at least twice in 2006. In the U.S., at least one increase is priced in for January and futures show a better than 50 percent chance of a second.

An index of manufacturing in the euro region rose to 53.6 this month, from 52.8 in November, said NTC Research Ltd., which compiled the measure based on a survey of about 3,000 purchasing managers for Royal Bank of Scotland Group Plc. A level above 50 indicates growth.

Losses in the dollar may be limited by speculation economic reports this week will show manufacturing expanded and the U.S. economy added jobs to payrolls in December.

The U.S. Institute for Supply Management is forecast to report today a reading of 57.5 for its December manufacturing index. That compares with 58.1 in November and the 55.7 average for all of 2005.

A Labor Department report on Jan. 6 will show U.S. employers added 200,000 new workers in December, according to the median estimate of 51 economists surveyed by Bloomberg. The economy added an average of 167,000 jobs a month last year. Economists predict the jobless rate will hold at 5 percent.

``I still see a U.S. dollar rally,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. With the ``economy strong, the market will continue to buy U.S. dollars.'' The euro will weaken to $1.15 and the yen to 122 against the dollar by the end of March, Grace forecast.

ECB Outlook

ECB officials have fueled speculation growth in Europe is robust enough for rates to rise, buoying the euro.

ECB council member Guy Quaden said in an interview with Trends-Tendances, a weekly Belgian magazine, that he can't guarantee rates will stay at current levels. The interview was published on Dec. 29.

``The euro probably is going to be one of the currencies that benefit the most'' this year, said Stephen Halmarick, co- head of economic and market analysis in Sydney at Citigroup Global Markets Australia Ltd. ``We do expect another couple of rate hikes from the ECB this year.''

The German government will this month say it expects the economy in 2006 to grow faster than previously estimated, Spiegel magazine reported in its latest edition.

The economy may expand as much as 1.8 percent, the magazine said, citing a draft of an Economics Ministry annual report. Current official forecasts show the economy growing 1.2 percent this year, after 0.8 percent in 2005.

To contact the reporter on this story: Kabir Chibber in London at kchibber@bloomberg.net; Joshua Krongold in New York at jkrongold2@bloomberg.net.

Last Updated: January 3, 2006 09:48 EST