May 3 (Bloomberg) -- The dollar traded near the highest in more than two weeks against the euro in Asia as U.S. Treasury yields increased relative to European bonds on speculation the Federal Reserve will raise interest rates later today.

The yield premium two-year U.S. notes offer above like-dated German bunds is close to the widest since September 2000. The Fed will probably raise its key lending rate for an eighth time in a year to 3 percent, while the European Central Bank has held its main interest rate unchanged at 2 percent since June 2003.

``People are going to concentrate on yield,'' said Craig Ferguson, a currency strategist at Australia & New Zealand Banking Group Ltd. The Fed's focus on raising rates to contain inflation ``justifies the view that you should remain long the U.S. dollar.'' An investor who is long an asset bets on it rising.

The dollar strengthened to $1.2855 per euro at 8:50 a.m. in Singapore, from $1.2865 in late Asian trading yesterday, according to electronic currency trading system EBS. Investors should increase buying of the U.S. dollar should it break below $1.2750 versus the euro, Melbourne-based Ferguson said.

The yen was little changed at 104.98, from 105.04 yesterday. Japanese markets are closed until May 6 because of public holidays.

The Fed will increase its target rate on overnight loans between banks a quarter percentage point to the highest since October 2001, according to all 101 economists surveyed by Bloomberg News. The decision is due at 2:15 p.m. in Washington.

Yield Premium

The yield advantage of two-year U.S. Treasury notes over equivalent German government notes is at 1.41 percentage points, close to its widest in almost five years. A year ago, two-year U.S. Treasury notes yielded 10 basis points less than their German counterparts. The yield premium has averaged 45 basis points in the past year. A basis point is 0.01 percentage point.

The gap has been exacerbated by evidence Europe's largest economy is faltering, holding German bund yields near record lows.

An index based on a poll of about 3,000 German purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc fell to 49.2 from 50.4 in March, according to figures available on the Internet yesterday. Economists forecast a drop to 49.8.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net

Last Updated: May 2, 2005 20:56 EDT