Oct. 4 (Bloomberg) -- The dollar may gain for a third day against the yen and the euro on expectations speeches by Federal Reserve officials will indicate more interest-rate increases.

The U.S. currency may extend gains that yesterday pushed it to a 16-month high against the yen after a private manufacturing index suggested Hurricane Katrina didn't slow U.S. economic growth. Fed Bank of Philadelphia President Anthony Santomero and Bank of St. Louis President William Poole will speak today.

``The difference in interest rates is likely to keep getting larger and that's going to be the biggest driver for the currencies,'' said Kazuhiko Fujisaki, a vice president of foreign- exchange sales in Tokyo at Mizuho Corporate Bank Ltd.

The dollar traded at 114.20 yen at 6:19 a.m. in London, according to electronic currency-dealing system EBS, from 114.12 late in New York yesterday, when it reached 114.38 yen, the strongest since May 18, 2004. The U.S. currency may gain to 114.80 this week, Fujisaki said.

The dollar was at $1.1925 per euro after gaining to $1.1900, the most since July 8.

Yields on interest-rate futures show traders are pricing in a 100 percent chance of an increase to 4 percent at the next meeting and an 80 percent probability of 4.25 percent on Dec. 13.

The speeches ``may well help push the probability of a December rate hike even higher,'' said Nandita Singh, a currency strategist in New York at JPMorgan Chase & Co. in a research report.

`Bottom Line'

Fed policy makers on Sept. 20 lifted the interest-rate target for the 11th straight time, to 3.75 percent, and said more increases were likely. The Bank of Japan has kept rates at almost zero since 2001 and the European Central Bank's rate has been 2 percent since June 2003.

Atlanta Federal Reserve President Jack Guynn yesterday said in an interview with Reuters that the Fed had ``a ways to go,'' to remove accommodation from U.S. interest rates.

``Bottom line -- don't fight the Fed,'' said David Mozina, a New York-based currency strategist at Lehman Brothers Holdings Inc. ``Both the euro and yen are susceptible to further falls.'' The U.S. currency will advance to 115 yen and $1.18 per euro by the next Fed meeting on Nov. 1, Mozina said.

A government report today may show U.S. factory orders increased 2 percent in August, the most since May, after a 1.9 percent decline in July, according to the median estimate of 53 economists in a Bloomberg News survey.

The Institute for Supply Management, a private industry group, yesterday said its factory index was 59.4 in September, up from 53.6 in August. Economists expected a reading of 52. Readings above 50 signal growth.

Mild Deflation

The yen may also decline after Finance Minister Sadakazu Tanigaki said Japan still needs to carry out efforts to end a decline in consumer prices.

``Mild deflation still persists in Japan, and we need efforts to overcome it,'' Tanigaki said at a regular press conference in Tokyo today. The Bank of Japan should make its own decision on when to shift monetary policy, he said.

The bank has pursued a so-called ``quantitative easing'' policy of pumping cash into the banking system and keeping interest rates near zero since March 2001 to help overcome falling consumer prices.

Bank of Japan policy maker Shin Nakahara yesterday said it may not be easy to achieve the conditions required for the bank to change its policy of flooding the economy with cash.

`Rapid Rise'

Declines in the yen may be limited after a technical indicator signaled the currency fell too fast.

The yen's 14-day relative strength index to the dollar was 71, according to EBS, signaling losses may be excessive. A level above 70 or below 30 may signal a change in direction. Against the euro, the dollar had a reading of 27.6.

``I would not be surprised to see the dollar facing an adjustment after its rapid rise against the yen and the euro,'' said Keizo Tanaka, a trading manager in Tokyo at Resona Bank Ltd. ``Dollar buying gained much more momentum than expected.''

Technical analysts at Citigroup Inc. said the dollar may extend gains against the euro to $1.1357 in the next two months after it closed at $1.2026 on Sept. 30.

The Sept. 30 close represents a ``bullish monthly reversal'' for the dollar as it reached a monthly high of $1.2119 against the euro on Aug. 1 and then tumbled to a three-month low of $1.2589 on Sept. 2, according to Citigroup.

``Our bias was that these levels would be very difficult to break,'' said Tom Fitzpatrick, a technical analyst at Citigroup in New York. Since the bullish monthly reversal was completed on Sept. 30, the firm's bias now is that there is another ``significant move down beginning'' for the euro.

U.S. Yields

Investors may buy the dollar to purchase U.S. Treasuries instead of German bunds. The premium in 10-year U.S. yields over those in Germany is near the highest in more than 5 1/2 years.

U.S. 10-year Treasuries offered 1.19 percentage points more than German debt with a similar maturity yesterday, the most since Jan. 20, 2000, according to figures compiled by Bloomberg.

``Investors think hurricanes had a very limited impact on U.S. corporate sectors and U.S. yields continue to look very healthy,'' said Satoru Ogasawara, a strategist at Credit Suisse First Boston in Tokyo. ``That's going to keep supporting the dollar.''

The dollar may strengthen to 115 yen and $1.18 versus the euro in the coming month, Ogasawara said, referring to the company's forecast.

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Kosuke Goto in Tokyo at at kgoto2@bloomberg.net

Last Updated: October 4, 2005 01:36 EDT