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By Bloomberg

The dollar was set for its first weekly gain in a month as investors focused on prospects for the Federal Reserve to increase interest rates as global peers ease policy.

A gauge of the greenback set its highest close in three weeks Thursday as traders raised bets that U.S. borrowing costs will climb this year, even as some Fed officials urge waiting until 2016. It hit a one-month low at the end of last week after a U.S. government report on nonfarm payrolls undershot even the most bearish of economists’ estimates.

“We’re moving back to a rate-differential story,” Mike Moran, head of macro research for the Americas at Standard Chartered Plc, said by telephone from New York. “The dollar correction of the last couple of weeks is starting to run its course.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, has added 1.6 percent this week to 1,201.75 as of 7:25 a.m. in London. It’s set for the first weekly advance since March 13, the day it closed at 1,222.12, the highest in data going back to 2004.

For the week, the dollar has strengthened 2.9 percent to $1.0661 per euro after rising for a fourth day Thursday. It has gained 1.3 percent to 120.50 yen since April 3.

Japan’s second-biggest debt fund, Kokusai Asset Management Co., is betting on a stronger dollar and expects one Fed rate increase this year before more in 2016.

Kokusai Bullish

“Gains from the U.S. dollar will remain central to returns,” Masataka Horii, a senior portfolio manager who helps oversee the company’s flagship Global Sovereign Open Fund, said in an April 6 interview. “Countries where the economy is improving and monetary policy is looking upwards tend to give better total returns.”

There’s a 58 percent chance the Fed will boost rates by year-end, up from a 53 percent probability at the start of this week, according to swaps data compiled by Bloomberg.

Minutes of the Fed’s March meeting released April 8 showed some policy makers recommended acting in June, while others argued for later this year. A couple of members favored holding until 2016. The meeting came before Labor Department data showed employers added the fewest jobs since 2013.

The European Central Bank and the Bank of Japan are carrying out unprecedented easing, while monetary authorities from Australia and Canada to India and Israel have cut rates this year.

“Everyone was worried that the Fed minutes would be more dovish than they actually were, so everyone rushed to buy back the dollar,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank Ltd. in New York. “There is a broad trend for dollar buying.”

Volatility Drops

The slow evolution of the Fed’s policy debate has led to a drop in currency market volatility that is reviving the carry trade, Societe Generale SA analysts, including Paris-based global head of rates and foreign-exchange research Vincent Chaigneau, wrote in a client note Thursday.

“FX markets are becalmed,” they wrote. “For now, the yen is a loser and anything with yield is a winner.”

Borrowing in yen to buy Australian dollars returned 2 percent this week, according to data compiled by Bloomberg. Using euros as the funding currency returned 3.7 percent.

Expectations for swings in global foreign-exchange rates as measured by a JPMorgan Chase & Co. gauge declined to the lowest in more than a month Thursday.

The International Monetary Fund warns the decline in volatility may not last.

“Liquidity can evaporate quickly if everyone rushes for the exit at the same time -- which could, for example, make for a bumpy ride when the Federal Reserve begins to raise short-term rates,” IMF Managing Director Christine Lagarde said in the text of a speech on Thursday.