Dec. 8 (Bloomberg) -- The dollar reached a three-week high against the yen and rallied versus the euro, Canadian dollar and a dozen other major currencies as some traders reduced bets the U.S. currency would decline.

``This has been coming for some time,'' said Jesper Dannesboe, a currency strategist at Credit Suisse First Boston in London. ``People have been watching the dollar's decline and getting more and more worried.''

Today's gains trimmed the dollar's drop this year to 2.8 percent against the yen and 5.5 percent versus the euro. The U.S. currency, which has fallen the past 10 weeks against the yen, climbed to 104.09 yen at 3:08 p.m. in New York, from 102.97 late yesterday, and to $1.3329 per euro from $1.3420, according to electronic currency-dealing system EBS.

The dollar's advance began after a Japanese government report today showed the world's second-largest economy grew less than expected in the third quarter as exports slowed. Investors also bought dollars after the Bank of Canada yesterday warned of ``a dampening effect'' on growth from Canadian dollar gains.

The U.S. currency surged by the most since April against the Canadian dollar, reaching the highest since October. The Bank of Canada yesterday dropped a pledge to raise its interest-rate target, now at 2.5 percent, ``over time.''

``Maybe we were a little overdone'' on the dollar's slide, said David Durrant, chief currency strategist at Bank Julius Baer & Co. in New York, which manages $95 billion. ``There's been a shift in expectations here'' on economic growth and interest rate- increase expectations. He expects the dollar to trade at $1.28 per euro in a year.

Fed Meeting

The Japanese report highlighted weakness in several major economies compared with the U.S., which expanded at a 3.9 percent annual pace in the third quarter. Goldman Sachs Group Inc. this week forecast the European Central Bank will cut interest rates next year as the region's economy slows.

``We are starting to get a growth slowdown globally and people are starting to buy dollars,'' said Kenneth Landon, a senior currency strategist in New York at JPMorgan Chase & Co., the second-biggest U.S. bank. ``It was time for a bit of a consolidation; we haven't had one in a while.''

Landon still expects a dollar decline to $1.37 per euro and 96 yen in three months.

Economists predict the Federal Reserve on Dec. 14 will raise its benchmark interest rate by a quarter-percentage point to 2.25 percent, for the fifth increase this year, according to the median estimate in a Bloomberg survey. An increase would mark the first time since 2001 that the Fed's target exceeds that of the European Central Bank, now at 2 percent, helping draw investors to dollars.

Futures Bets

The dollar's rally spurred gains in U.S. Treasury notes by allaying speculation international investors will shun U.S. assets. Gold fell as the dollar's rebound eroded the appeal of the precious metal.

Futures traders as of Nov. 30 held about 39,000 net contracts betting the yen would gain against the dollar, the second-most since February, according to data from the Commodity Futures Trading Commission. Bets on gains in the British pound and Swiss franc last month reached the highest since 1999.

``We are seeing a year-end liquidation of short dollar positions,'' or bets the U.S. currency will decline, said T.J. Marta, a currency strategist in New York at RBC Capital Markets. The decline dollar's recovery could be exacerbated by buying from investors such as hedge funds, he said.

Marta predicted the dollar will rise to $1.30 per euro by year-end and then fall to $1.35 per euro by the end of March.

`Sluggish' Japan

The New York Board of Trade's Dollar Index rose to 82.09 from 81.24 late yesterday. The gauge averages exchange rates between the dollar and six other currencies, with the euro accounting for 58 percent. This month it touched the lowest since May 1995.

Japan's economy grew at a 0.2 percent annual pace in the third quarter, less than the expected rate of 1.1 percent that was the median forecast in a Bloomberg survey.

``Japan's economy has been sluggish,'' said Hideyuki Tsukamoto, a foreign-exchange manager in Tokyo at Mizuho Bank Ltd., a unit of Japan's biggest lender. ``With the economy on a gradual path of slowdown, there's been concern Japan may sell'' its currency to protect exporters.

Japan sold a record 32.9 trillion yen ($320 billion) in the year through March 31. Finance Minister Sadakazu Tanigaki said ``we must take appropriate action in a timely manner,'' at a Tokyo press conference yesterday.

Current Account

Declines in the dollar may resume amid speculation a record U.S. current-account deficit will undermine demand for the currency. The deficit reached $166.2 billion in the second quarter. A wider gap means more dollars need to be converted into other currencies to pay for imports. The dollar last month fell against every major currency.

The dollar will remain weak for the next one to two years, Holger Haerter, chief financial officer of German carmaker Porsche AG said today.

``The dollar-weakness story has further to run,'' said Riz Din, a currency strategist at Barclays Capital in London. Gains in the dollar today may be a ``buying opportunity,'' he said, forecasting it will fall to $1.35 per euro in three months.

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

Last Updated: December 8, 2004 15:17 EST