Jan. 6 (Bloomberg) -- The dollar rose against the euro for a fifth day, the longest rally in more than a year, on optimism faster U.S. job growth will bolster the case for higher interest rates, widening a gap with the euro region.

The Labor Department may say tomorrow U.S. employers hired 175,000 workers last month, according to the median forecast in a Bloomberg survey. The Federal Reserve said Jan. 4 its target rate is too low to slow inflation, helping spur the biggest one-day gain in the dollar since August.

``Everybody is looking for tomorrow's numbers to come in above consensus,'' said Andreas Mann, senior currency trader in New York at Commerzbank Securities, a unit of Germany's fourth- biggest bank. Combined with higher rates in the U.S. than in Europe, ``that's a pretty good argument for the euro to have a sell-off and the dollar to be stronger,'' he said.

Against the euro, the dollar gained 0.7 percent to $1.3175 at 1:48 p.m. in New York, from $1.3261 late yesterday, according to electronic foreign-exchange trading system EBS. It hasn't advanced for five straight days versus the euro since October 2003. The U.S. currency also climbed to 104.98 yen, from 104.14.

The dollar may reach $1.3075 per euro should tomorrow's report show the U.S. economy added more than 200,000 jobs in December, Mann said.

The U.S. currency remained higher after the Labor Department said initial jobless claims increased by 43,000 in the week that ended Jan. 1, the biggest jump since March 2002, from 321,000 a week earlier. The number may be inflated because of difficulties adjusting for seasonal variations.

`Very Strong'

``Nobody wants to be aggressively selling the dollar ahead of a jobs report that could be very strong,'' said Kamal Sharma, a currency strategist at Dresdner Kleinwort Wasserstein in London. ``We could get down to $1.3130 this week, but then we'd be looking to buy euros again.''

The Fed lifted its target rate for overnight bank loans five times last year, to 2.25 percent, a quarter point above the European Central Bank's benchmark.

``It's very difficult to not recognize the difference between the strength of the U.S. economy and Europe and Japan,'' said Jeremy Fand, senior proprietary trader in New York at WestLB AG. ``The first quarter this year is about the recognition the U.S. is the best place to invest.'' He expects the dollar to rise to $1.28 per euro by the end of the quarter.

3-Cent Gain

The dollar this week has risen more than 3 cents against the euro. The U.S. currency moves by an average of about 1.5 cents against the euro after the monthly employment report, according to data compiled by Bloomberg for last year. The median forecast for December's job gain would mark an acceleration from the 112,000 workers hired the previous month.

Against Japan's currency, the dollar rose by 2 yen two days ago. Such a movement is ``wild,'' and Japan will act on currencies as necessary, Vice Finance Minister Hiroshi Watanabe told reporters in Tokyo today. Bank of Japan Governor Toshihiko Fukui said in speech in New York that he's monitoring exchange rates closely.

Further gains in the dollar may be limited as some traders will probably place fresh bets on the dollar to slide, said Kristjan Kasikov, a currency strategist in London at Calyon, the investment-banking unit of Credit Agricole SA.

Tomorrow's U.S. job growth figure would have to exceed 200,000 for the dollar to extend gains, Kasikov said. ``It will take quite a spectacular number to inspire any more buying.'' Calyon predicts the dollar will fall to $1.35 per euro and 102 yen at the end of the first quarter.

2004 Decline

The dollar dropped 7 percent in 2004 against a basket of six major currencies, hurt by concern record U.S. current-account and budget deficits will undermine demand for the currency. It fell to a record $1.3666 per euro on Dec. 30.

The shortfall in the current account, the widest measure of trade because it includes some investment flows, reached a record $164.7 billion in the third quarter. A wider deficit means more dollars need to be converted to other currencies to pay for imports. The U.S. also had a record $412 billion federal budget deficit for the fiscal year ended Sept. 30.

Volkswagen AG, Europe's biggest carmaker, lost 1 billion euros ($1.3 billion) in the U.S. last year, partly because of a falling dollar, Chief Executive Bernd Pischetsrieder said in an interview.

Not `Out of the Woods'

``As U.S. interest rates edge higher, the simple ability to attract capital will improve,'' said Thomas O'Malley, head of global currency portfolio management in San Francisco at Barclays Global Investors, with more than $1 trillion in assets. ``However, I think we've got quite a long way to go before we are out of the woods for the U.S. dollar.'' The dollar may fall to $1.40 per euro and 100 yen this quarter, he said.

Minutes from the Fed's Dec. 14 meeting released on Jan. 4 said rates are ``below the level'' needed to slow inflation. Fed policy makers are next scheduled to meet on Feb. 1-2.

Yields on interest-rate futures have risen as traders raised bets for U.S. rate increases this year. The yield on December Eurodollar futures contracts was 3.67 percent, from 3.47 percent a month ago. The contract settles at a three-month lending rate that has averaged 0.22 percentage point above the Fed's target in the past 10 years.

The euro stayed lower after the Bloomberg purchasing manager index for the 12-nation euro region showed retail sales rose for the first month in five in December. The gauge compiled for Bloomberg by NTC Research Ltd. climbed to a seasonally adjusted 50.6 from 48 in November. Business confidence in the region fell in December, the European Commission said today in Brussels.

To contact the reporter on this story: Joshua Krongold in New York at jkrongold2@bloomberg.net; Mark Tannenbaum in New York at at mtannen@bloomberg.net.

Last Updated: January 6, 2005 13:56 EST