Oct. 9 (Bloomberg) -- The dollar rose the most in two months against the yen after Federal Reserve Chairman Ben S. Bernanke said the bank is ready to tighten monetary policy once the economy improves, increasing the appeal of U.S. assets.

The Dollar Index, which tracks the currency against six U.S. trading partners, recovered from a 14-month low after Bernanke signaled interest rates may rise when the economy “has improved sufficiently.” The yen dropped against all but three of the 16 most-traded currencies after Japan’s machinery orders gained less than forecast.

“People took the comments as an opportunity to take some money off the table before the weekend,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. “They came at an opportune time and allowed some people to get some profit out from bets against the dollar.”

The U.S. currency climbed 0.5 percent to 88.85 yen as of 6:25 a.m. in New York, from 88.39 yen yesterday, after rising as much as 1.2 percent, the steepest daily gain since Aug. 7. That trimmed the dollar’s loss this week to 1 percent. It strengthened to $1.4739 per euro, from $1.4794, paring a 1.1 percent decline on the week.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.3 percent to 76.191. It touched 75.767 yesterday, the lowest level since Aug. 11, 2008. The dollar will end the year at $1.55 per euro, according to Derrick.

‘Hawkish Tone’

“Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” Bernanke said in prepared remarks at a Board of Governors conference in Washington. “We will need to tighten monetary policy to prevent the emergence of an inflation problem down the road,” he also said.

The Fed chairman’s comments echoed language from last month’s meeting of the Federal Open Market Committee and those of Kansas City Fed President Thomas Hoenig, who on Oct. 6 said raising interest rates wouldn’t derail the U.S. economic recovery.

“This is a further step forward in preparing the financial markets for the removal of monetary accommodation which we still believe will take place no later than the summer of next year,” Derek Halpenny, European head of global currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a report today. “The ‘extended period’ phrase could therefore be under threat by the December or January FOMC statements.”

‘Incremental Increases’

“Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy,” Hoenig said in Denver. “I would not support a tight monetary policy in the current environment, but my experience tells me that we will need to remove our very accommodative policy sooner rather than later.”

White House economic adviser Lawrence Summers repeated the administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner.

“He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said at a forum in New York organized by Bloomberg LP, the parent of Bloomberg News.

The yen dropped as Japan’s machinery orders rose 0.5 percent in August after falling 9.3 percent in July, the Cabinet Office reported in Tokyo. The median estimate of 27 economists in a Bloomberg survey called for a 2.1 percent gain.

“The data add to speculation Japan will be the last to recover,” said Toshiya Yamauchi, a Tokyo-based manager of the foreign-exchange margin trading department at Ueda Harlow Ltd. “As other nations lead the global economic recovery, the yen will likely be sold as a funding currency.”

Yen Momentum Fades

Japan’s currency is likely to weaken over the next 12 months as “momentum” fades from a tax break on overseas earnings, according to Brown Brothers Harriman & Co. Since April 1, Japanese exporters have been able to bring back income earned outside the country without paying the combined 40 percent tax.

“It’s largely momentum trading right now and we’re pushing it because we haven’t reached a pain threshold of anything to stop us,” said Marc Chandler, global head of currency strategy at Brown Brothers in New York. “The reason the Japanese stock market underperforms despite having a strong yen is precisely because they have a strong yen. It’s eroding corporate profits.”

Japan’s currency will probably fall to between 105 and 110 versus the dollar in the next 12 months, Chandler predicted.

Aussie Dollar

Australia’s dollar has gained 4.6 percent this week versus its U.S. counterpart, the most since the five days ended May 8. All but two of the 23 economists surveyed by Bloomberg predict the Reserve Bank of Australia will raise the overnight cash rate target on Nov. 3 by a quarter percentage point to 3.5 percent.

Investors are wagering on a 96 percent chance the central bank follows with another increase in December to end the year with a cash rate at 3.75 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

“The central bank will probably hike rates twice more this year as fundamentals such as employment seem to be improving,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “High- yielding currencies such as the Aussie dollar will likely be bought more. Risk-taking appetite is high.”

Euro-Yen

The euro advanced against the yen after European Central Bank President Jean-Claude Trichet said yesterday the region’s economy is emerging from a period of “freefall,” damping demand for Japan’s currency as a refuge.

The common European currency rose 0.2 percent to 130.99 yen, after strengthening 0.5 percent yesterday.

Trichet signaled the ECB will keep interest rates at a record low to spur growth.

“The current rates remain appropriate,” Trichet said at a press conference in Venice after policy makers left the main refinancing rate at 1 percent. “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” he said, reiterating the Group of Seven’s statement on currencies.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

Last Updated: October 9, 2009 06:59 EDT