May 29 (Bloomberg) -- The dollar rose to the highest level in more than a week against the euro after Federal Reserve Bank of Dallas President Richard Fisher said the central bank will raise interest rates should consumers expect faster inflation.

The currency also gained for a fourth day against the yen before a U.S. government report today that will probably show the economy grew at a faster pace than initially estimated last quarter. The dollar also strengthened as oil fell close to $130 a barrel on concern consumers will limit fuel purchases.

``The Fed has switched tracks and the focus is now clearly on inflation and there's a hike priced in for the next 12 months,'' said Geoffrey Yu, a strategist in Zurich at UBS AG, the world's second-biggest currency trader. ``The Fed is going to take a much more hawkish stance. If oil starts to drift lower, the dollar will strengthen.''

The dollar rose to $1.5664 per euro, the strongest since May 20, before trading at $1.5578 at 9:26 a.m. in London, from $1.5638 yesterday in New York. It advanced to 105.16 yen, after rising yesterday to 105.31 yen, the strongest since May 14. The yen was at 163.76 per euro after touching 164.48 yesterday, the weakest since April 24.

Futures on the Chicago Board of Trade yesterday showed a 30 percent chance the Fed will raise its target rate by a quarter- percentage point to 2.25 percent on Sept. 16, up from 21 percent a week ago. The central bank has cut rates seven times since September. Japan's benchmark rate is 0.5 percent, Australia's is 7.25 percent and Europe's is 4 percent.

`Change of Course'

Should ``inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later,'' Fisher said in a speech in San Francisco. Fed members Gary Stern and Timothy Geithner speak later today. All three vote on monetary policy.

``Fed comments may buoy the dollar,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``For the first half of this year the Fed placed more importance on economic growth than on inflation. Investors are now positioning for the pendulum to swing the other way.'' The dollar may reach 105 yen in the next two days, he said.

The U.S. economy probably expanded at a 0.9 percent annual pace last quarter, faster than the Commerce Department's April 30 estimate of 0.6 percent, according to a Bloomberg News survey. The report is scheduled for release at 8:30 a.m. in Washington.

Data yesterday showed U.S. durable goods orders excluding transportation equipment rose 2.5 percent in April, while the median forecast in a Bloomberg survey was for a 0.5 percent drop.

Buy Dollar-Yen

``We remain confident that dollar-yen will break higher,'' analysts led by Hans-Guenter Redeker at BNP Paribas SA wrote in a research note yesterday. ``The U.S. has surprised with strong durable good orders. Bond yields' direction of least resistance might be to the upside. The strong correlation between bond yields and dollar-yen suggests a higher dollar.''

Investors should buy the dollar as long as it remains above 103.70 yen with a target of 107 yen, according to BNP Paribas.

The yen fell against the Australian dollar and was near a one-month low versus the euro as stock gains encouraged the purchase of higher-yielding assets funded in the Japanese currency.

Against the Australian dollar, a favorite of so-called carry trades, the yen declined to 101.08, the weakest since Nov. 14. The MSCI Asia Pacific Index of regional shares rose 1.5 percent, the most in more than a month, as concern eased the U.S. economy will slow.

Yield Spread

In the carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the difference between the two. The risk is currency moves erase those profits.

Against the yen, the dollar's correlation with two-year Treasury yields was 0.97 in the past year, Bloomberg data show. A reading of 1 means two variables move in lockstep.

The yield advantage on two-year Treasuries over similar- maturity Japanese government debt was 1.78 percentage points, the widest since January. The gap between the yields fell below 1 percentage point in March. The Treasury sold $30 billion of two-year notes yesterday at a yield of 2.640 percent, higher than the Fed's target rate for the first time since June 2006.

Unemployment Report

The euro also declined after a government report showed unemployment in Germany unexpectedly rose in May for the first time in more than two years. The number of people out of work, adjusted for seasonal swings, rose 4,000 from April to 3.31 million, the Nuremberg-based Federal Labor Agency said today. Economists expected a decline of 25,000, according to the median of a Bloomberg News survey of 36 forecasts.

Accelerating inflation may still buoy the single currency, giving the European Central Bank more reason to raise interest rates, said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital, Britain's third-biggest bank.

Consumer prices in the euro region rose 3.5 percent in May, faster than the 3.3 percent gain in April, according to a Bloomberg News survey. The European Union's statistics office will release the figure tomorrow.

``The euro will head higher, as the European economy is firmer than the markets had expected,'' Umemoto said. ``Inflation data also remain very strong. This will force the ECB to remain hawkish and its next move should be a rate hike in the first quarter.'' The currency may rise to $1.59 in one month, Umemoto said.

The British pound may strengthen to a one-month high of 209 yen early next week, based on charts that traders use to predict price movements, said Hiroshi Koga, head of the foreign exchange department of Athena FX Co. The pound last bought 207.37 yen, from 207.42.

Traders may increase purchases of the pound as the currency stays above an ascending trend line of support, connecting lows of 192.58 on March 17 and 199.80 on May 9, he said. The U.K. pound may next move to about 209, which is its previous high of 209.05 set on May 2, according to Koga.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: May 29, 2008 04:45 EDT