Sept. 23 (Bloomberg) -- The dollar headed for a third weekly gain against the euro, the longest winning streak since May, on speculation the interest rate advantage on U.S. debt versus European bonds will increase.

Some investors are setting aside concerns about Hurricane Rita and higher oil prices to focus on the benefits to the dollar of the Federal Reserve's ``measured'' rate increases. The dollar had its biggest drop in three weeks on Sept. 21 as Rita gathered strength as it approached the Texas coast.

``The likelihood is into the next year rates will be going higher, and that's why the U.S. dollar is performing reasonably well,'' said Greg Gibbs, a currency strategist in Sydney at RBC Capital Markets Ltd. ``I'm quite confident recent events will be temporary.''

Against the euro, the dollar was at $1.2149 at 6:21 a.m. in London, from $1.2156 late yesterday in New York and $1.2234 on Sept. 16, electronic foreign-exchange dealing system EBS showed. The dollar traded at 111.64 yen, from 111.72 yesterday and 111.34 a week ago.

The U.S. currency may gain to $1.20 against the euro and to 113 yen next week, Gibbs said. There may be less trading than usual today because Japanese financial markets are closed for a holiday, he said.

UBS AG raised its forecast for the dollar versus the euro and the yen after the bank's economists this week increased their year-end target for U.S. interest rates.

Higher Dollar Target

The bank raised its year-end forecast for the Fed's key interest rate to 4.25 percent from 4 percent after the central bank lifted its overnight lending rate between banks a quarter point to 3.75 percent on Sept. 20. UBS was one of four of the 22 firms that trade directly with the Fed that had predicted no change, the first time since May they have disagreed.

``We have raised our one-month dollar targets versus the euro and yen this week in recognition of the shift in Fed views,'' the bank's currency strategists, headed by Mansoor Mohi- uddin in London, wrote in a note to clients.

UBS now expects the dollar to drop to $1.24 in one month, compared with its previous forecast of $1.27. Against the yen, it forecasts the dollar will trade at 109 in one month, up from a previous prediction of 108.

The Fed's rate compares with the European Central Bank's key rate of 2 percent and almost zero percent in Japan.

The extra yield investors get for owning U.S. 10-year Treasuries over German Bunds with similar maturity was 1.15 percentage points this week, matching the highest since May 2000, according to data compiled by Bloomberg.

Rita, Katrina

Gains in the dollar today may be limited by concern Rita will add to the disruption of oil supply caused last month by Hurricane Katrina in the Gulf, where 44 percent of U.S. refining capacity is located.

``The market will be dominated by developments with Hurricane Rita,'' said Sue Trinh, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``The dollar will remain relatively weak.''

The U.S. currency may be capped at $1.21 versus the euro and 112 yen, Trinh said.

The threat Rita poses to rigs, refineries and platforms in the Gulf pushed the price of crude oil higher yesterday before falling back after the storm was downgraded to a Category 4 hurricane from Category 5.

Crude oil for November delivery was at $66.19 a barrel in electronic trading. Yesterday, oil fell 0.5 percent to $66.50, after reaching $68.14.

`Can't Stop It'

``There's two things you know about the weather: One, you can't stop it; and two, you can't predict it,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``I wouldn't want to be heavily involved in foreign- exchange markets in next 24 hours.''

The yen may strengthen on speculation China will come under pressure to allow its currency to appreciate after Japan's Finance Minister Sadakazu Tanigaki said he will discuss the yuan with U.S. Treasury Secretary John Snow. They will meet tomorrow on the sidelines of the Group of Seven finance ministers and central bankers' meeting.

A stronger yuan would boost Chinese consumers' purchasing power for imports from Asia and make the country's exports less competitive against regional rivals.

``It's clearly yen positive, especially when China is gradually allowing the yuan to appreciate day by day,'' said Craig Ferguson, a currency strategist at Australia & New Zealand Banking Group Ltd. in Melbourne.

The yuan has risen less than 0.3 percent since the People's Bank of China revalued the currency on July 21. The yen surged 2.3 percent that day.

To contact the reporter on this story: Kosuke Goto at at kgoto2@bloomberg.net.

Last Updated: September 23, 2005 01:26 EDT