July 19 (Bloomberg) -- The dollar gained against the euro and rose close to the strongest in a year versus the yen on speculation an increase in U.S. Treasury yields to the highest in two months will spur foreign demand.

Ten-year U.S. yields exceeded those of Germany the most in five years yesterday. The gap may widen further should Federal Reserve Chairman Alan Greenspan tomorrow signal continued interest-rate increases, said analysts including Jeremy Stretch at Rabobank Groep. The dollar is up 13 percent versus the euro this year as the Fed lifted its target at each policy meeting.

``He's going to continue to lay out the path of measured rate increases,'' said Stretch, a currency strategist at Rabobank in London. ``The interest rate-spread is at a five-year high and there's a prospect of it widening so that will continue to be dollar supportive.''

The dollar rose to $1.20 per euro at 7:56 a.m. in London, from $1.2052 late yesterday in New York, according to currency- dealing system EBS. It also advanced to 112.32 yen, from 111.97. It rose as high as 112.60 on July 8, the highest since May 2004.

The yield on the benchmark 10-year Treasury advanced to 4.22 percent yesterday, the highest since May 12. It was at 4.21 percent today.

The spread between 10-year U.S. Treasury notes and similar- maturity German government bonds yesterday widened to 99 basis points, the most since 2000. The gap was 54 basis points on Dec. 31 and there was no difference in September. A basis point is 0.01 percentage point.

``Yield differentials have been providing some support for the U.S. dollar,'' said Claudio Piron, a currency strategist in Singapore at JPMorgan Chase & Co. ``It's no secret the Fed will hike rates in August.'' The bank forecasts the dollar rising to $1.15 per euro and 115 yen by the end of the year, Piron said.

`Smoldering Issue'

Any decline in the yen may be limited by speculation China is moving closer to letting its yuan trade more freely against the dollar.

China should revalue its currency in the second half of the year, according to a government survey of state economists published yesterday. A stronger yuan would help Japan's export competitiveness with China, boosting the yen, which yesterday traded near a 13-month low against the dollar.

``The yen looks to be undervalued,'' said Sabrina Jacobs, a currency analyst in Singapore at Dresdner Kleinwort Wasserstein. Japan's currency ``could benefit more proportionally should China move.''

China should take ``bold action'' to loosen the yuan's peg to the dollar, Japanese Finance Minister Sadakazu Tanigaki said today.

ZEW Report

The euro may draw support because of expectations a report today from the ZEW Center for European Economic Research will show investor confidence in Germany, Europe's largest economy, rose for a second month in July.

The euro has gained 1.2 percent since reaching a 13-month low on July 5 as reports suggested Europe's economy may be picking up and European Central Bank officials indicated they don't favor cutting interest rates. A European Union report yesterday showed inflation in the region accelerated last month.

``A good ZEW number is positive for the euro,'' said Akira Takei at Fuji Investment Management Co. in Tokyo, which oversees about $9.1 billion. ``There's been some improvement in the euro- zone data, reducing the need for the ECB to cut rates.''

Takei bought the euro recently, expecting it to gain to $1.35 in six months, he said.

The U.S. economy is ``coping pretty well'' with higher energy prices, Greenspan said in a letter released yesterday by the Joint Economic Committee of Congress. He is scheduled to deliver his semi-annual testimony on the economy to the House and Senate tomorrow and the day after.

`A Good Account'

Fed policy makers lifted their target for overnight loans between banks by a quarter percentage point to 3.25 percent on June 30. The European Central Bank kept its benchmark rate at 2 percent on July 7, the level it's been at for two years. The Bank of Japan has kept interest rates at about zero since 2001.

Greenspan ``is going to give a good account of the U.S. economy,'' said Michael Woolfolk, senior currency strategist in New York at the Bank of New York. ``That should give some support to the U.S. dollar.''

Gains in the dollar accelerated when it rose above 112 yen, where automatic orders to buy the U.S. currency had been placed, according to Kosuke Hanao, head of foreign exchange at Royal Bank of Scotland Group Plc in Tokyo. Traders typically place pre-set orders to buy or sell a currency to limit losses in the event their bets go the wrong way.

To contact the reporter on this story: John Brinsley in Tokyo at at jbrinsley@bloomberg.net.

Last Updated: July 19, 2005 02:58 EDT