Nov. 23 (Bloomberg) -- The dollar rose from a two-week low against the euro as traders anticipate interest rates in the U.S. will remain higher than in Europe even as the Federal Reserve signals it may be nearing the end of its rate increases.

The U.S. currency also erased a drop against the yen. The dollar earlier today fell to $1.1865 per euro, the lowest since Nov. 4, after minutes from this month's Fed policy meeting showed some officials were worried about the risk of lifting rates too high.

``The dollar has been king over the past year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``The reaction in the market is slightly overdone.''

Against the euro, the dollar traded at $1.1823 at 5 p.m. in New York from $1.1814 late yesterday, according to electronic foreign-exchange dealing system EBS. The dollar was little changed at 118.73 yen from 118.74 late yesterday, after earlier weakening to 118.20.

Currency trading volume was about 25 percent lower than a typical day because of tomorrow's Thanksgiving holiday in the U.S., said John Cholakis, a currency trader in New York at Natexis Banques Populaires. The Bond Market Association recommended a 2 p.m. closing for bond trading today.

The dollar has gained about 15 percent against the euro and the yen this year as the Fed raised its interest-rate target seven times to 4 percent. The European Central Bank has indicated it may lift its benchmark rate next month from 2 percent, the first increase in five years. The Bank of Japan has kept interest rates near zero since 2000.

`Overreacted'

``The market has overreacted, and we still think the Fed's going to keep going to 5 percent next year,'' said Jesper Dannesboe, a currency strategist in London at Credit Suisse First Boston. ``Plus, we don't believe the ECB will raise rates very dramatically, and nothing like the Fed.''

Dannesboe forecasts the dollar will strengthen to $1.14 against the euro in the next three months.

The U.S. currency dropped 0.8 percent against the euro, the most in three weeks, after yesterday's release of the Nov. 1 meeting minutes, which showed the Fed discussed the need ``before long'' to change its outlook for the benchmark rate.

The dollar pared its loss after midnight, London time, following the publication by Reuters of an interview with Fed Bank of Richmond President Jeffrey Lacker. Lacker said policy makers haven't finished increasing rates.

`Not Done'

``It is clear we're not done removing accommodation,'' Lacker, a voting member of the Fed's policy-setting committee next year, said in the interview.

The dollar remained higher versus the euro earlier after the U.S. government said the number of Americans filing first- time claims for unemployment insurance rose to 335,000 in the week ended Nov. 18 from a revised 305,000 a week earlier. The University of Michigan revised its index of consumer confidence for November to 81.6 from its earlier estimate of 79.9.

The euro failed to gain even after a report showed Italian consumer confidence unexpectedly rose to the highest in three years this month after the economy returned to growth.

The euro region's economy expanded 0.6 percent in the third quarter, up from 0.3 percent in the preceding three months, the European Union's statistics office said on Nov. 16. U.S. gross domestic product grew at a 3.8 percent annual rate in the third quarter.

`Very Gradual'

``European growth is still a lot less than U.S.,'' said Tim Fox, a currency strategist at Dresdner Kleinwort Wasserstein in London. ``The European recovery is still looking very gradual. It's by no means certain that we've seen the peak in the dollar against the euro yet.''

The yield on federal fund futures for April delivery yesterday fell 6.5 basis points at the Chicago Board of Trade to 4.58 percent. The drop suggests traders see a 32 percent chance of an increase to 4.75 percent by April, down from 58 percent the previous day. The yield was 4.605 percent today. A basis point is 0.01 percentage point.

``Rates are still going higher especially as there's been reassurance from Lacker that we're going to get the next few moves, which has calmed things down a touch,'' said Fox.

Goldman Sachs Group Inc. said in a research report published yesterday that the Fed will still raise its main rate to 5 percent by the middle of 2006.

Euribor interest-rate futures suggest the ECB will raise its benchmark rate by half a percentage point to 2.5 percent before the end of March.

To contact the reporter on this story: Jake Lee in London at jlee127@bloomberg.net; Joshua Krongold in New York at jkrongold2@bloomberg.net.

Last Updated: November 23, 2005 17:01 EST