Jan. 5 (Bloomberg) -- The dollar rose to a three-week high against the euro and advanced versus the yen on speculation President-elect Barack Obama’s fiscal stimulus will help the U.S. economy recover from recession.

The greenback also gained versus the Swiss franc and the Danish krone as a transition official said Obama’s package will include hundreds of billions of dollars of tax breaks. The pound appreciated against the euro, dimming the possibility it will slide to parity, on bets the U.K. government will guarantee asset-backed securities to revive bank lending.

“America was the first one that got into this mess and will be the first country that drags itself out,” said Andrew Wilkinson, a senior market analyst in Greenwich, Connecticut, at Interactive Brokers Group Inc., which handles about a fifth of all options traded in the U.S. “Europe is further behind the curve, and the European Central Bank has to do what the U.S. has done in terms of cutting interest rates.”

The dollar gained 2.6 percent to $1.3575 per euro at 4 p.m. in New York, from $1.3921 on Jan. 2. It touched $1.3547, the strongest level since Dec. 15. The U.S. currency will rally to $1.20 in three months, according to Wilkinson. The dollar gained 1.6 percent to 93.28 yen from 91.83, after touching 93.57, the highest level since Dec. 8. The euro fell 0.9 percent to 126.65 yen from 127.76.

Sterling strengthened beyond 93 pence per euro for the first time since Dec. 22, gaining 3.4 percent to 92.46 pence. The pound slid to 98.03 on Dec. 30, the weakest since the European currency’s 1999 debut. The pound increased 1 percent to $1.4692 today.

BOE’s King

Bank of England Governor Mervyn King’s first course of action this year will probably be to expand the 200 billion- pound ($290 billion) program that allows banks to swap illiquid securities for government debt, according to economists.

The euro slid today against 14 of the 16 most actively traded currencies tracked by Bloomberg on speculation the European Central Bank will make further cuts in its main refinancing rate, now 2.5 percent. The 16-nation currency declined 4.2 percent against the dollar in 2008.

“Poor economic fundamentals in the euro land warrant further rate cuts from the ECB,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments LLC in Boston. “The interest- rate differential is moving in favor of the dollar again.” The euro may fall to $1.30 in three months, said Upadhyaya.

Last month, the Federal Reserve reduced the target for the fed funds rate, which banks charge one another for overnight loans, to a range of zero to 0.25 percent for the first time.

Euro Outlook

The euro may decline 10 percent against a basket of European currencies including the pound, the Norwegian krone and the Swedish krona, according to Goldman Sachs Group Inc.

“Forced euro buying is likely to abate as tension in credit markets becomes less severe,” currency strategists at Goldman Sachs led by New York-based Jens Nordvig wrote in a report today.

The yen fell 3.6 percent to 6.92 against Mexico’s peso and 2.7 percent to 137.30 versus the pound on speculation investors will resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 8.25 percent in Mexico and 2 percent in the U.K.

Japan’s currency rose 23 percent against the dollar in 2008 and hit a 13-year high against the dollar last month, cutting into repatriated earnings and undermining the competitiveness of the nation’s exports.

BOJ on Yen

The Bank of Japan may consider measures including monetary policy to counter the rising yen as the economy faces severe conditions in 2009, Governor Masaaki Shirakawa told public broadcaster NHK yesterday.

The greenback gained 2.6 percent to 5.4866 Danish krone and 2.7 percent to 1.1102 Swiss franc today as a transition official and Democratic aides said Obama plans to seek congressional approval in coming weeks for an economic stimulus plan that may total $775 billion. Tax cuts may account for 40 percent of the package, they said.

“I am very bullish on the dollar throughout 2009,” said Matt Esteve, foreign-exchange trader at currency-trading firm Tempus Consulting Inc. in Washington, in an interview on Bloomberg Television. “I think it’s because the U.S. economy is best set for recovery in 2009.” The dollar will advance to $1.10 per euro and 110 yen by year-end, according to Esteve.

The dollar, yen and franc may weaken this year against 2008’s biggest losers in the currency markets as the global economy starts to recover, according to the largest foreign- exchange strategists and investors.

The winners will be the Brazilian real, Indonesian rupiah and Polish zloty as investors return to higher-yielding assets, according to Bloomberg News surveys. The dollar may strengthen versus the euro and the yen, while dropping against the pound.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: January 5, 2009 16:02 EST