NEW YORK (Bloomberg) — The dollar posted its biggest gain since February 1999 against the yen as a better-than-forecast non-farm payrolls report encouraged traders to boost bets on Federal Reserve interest rate increases.

The yen fell this week against all of its 16 major counterparts on speculation Japan's currency will regain its status as the primary funding vehicle for higher-yielding investments. The euro dropped against the Mexican peso and Polish zloty as demand increased for riskier assets that offer more returns. The Fed holds its last policy-setting meeting of the year on December 16.

"What the job numbers do is firm up expectations that the Fed interest-rate hike is coming," said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation's third-largest lender. "That should be a strong-dollar story."

The dollar rose 4.7 percent to 90.56 yen this week, the biggest gain since the five-day period ended February 19, 1999, when an unexpected narrowing of the US trade deficit fuelled optimism that the economy would expand. The US currency appreciated 0.9 percent to $1.4858 per euro from $1.4988. The euro advanced 3.8 percent to 134.54 yen from 129.67.

Futures on the Chicago Board of Trade showed a 53 percent chance yesterday that the Fed will raise the target lending rate by at least a quarter-percentage point by the June meeting, up from 31 percent a week earlier.

Employers eliminated 11,000 jobs in November, the fewest since the recession began, the Labor Department reported on Friday. The median forecast of 82 economists in a Bloomberg survey was for a reduction of 125,000 jobs. The unemployment rate decreased to 10 percent.

"This number speaks for itself," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. "High-yielding currencies are doing well. Poland is doing well in Eastern Europe."

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major US trading partners, rose 1.2 percent this week to 75.911, the biggest gain since June. It gained 1.7 percent yesterday, erasing what had been a weekly drop.

The gauge has fallen about 19 percent from a three-year high reached in March, dropping on speculation that the Fed would be slow in raising borrowing costs.

The last time the Dollar Index rose the day a payrolls report exceeded expectations was on Aug. 7, when it climbed 1.2 percent. Employers eliminated 247,000 jobs in July, compared with the median forecast of 325,000.

Canada's currency advanced 0.4 percent to C$1.0580 versus its US counterpart, paring its gain this week as crude oil and gold tumbled. It rallied earlier yesterday as much as 1.3 percent on the nation's job gains last month.

Poland's zloty climbed 2.3 percent to 4.0616 versus the euro this week, the biggest advance since November 13. The Mexican peso gained three percent to 18.8185 per euro. Australia's currency rose 5.6 percent to 82.83 yen. New Zealand's dollar advanced 5.4 percent to 64.87 yen.

"Canada should do better, Aussie and kiwi should do better," said Daniel Janis, who oversees $3.6 billion in global bonds and currencies as portfolio manager at MFC Global Investment Management in Boston. "If you have the monster gorilla starting to do a little better, wouldn't that be better for world growth and world trade?"

Luxembourg's Jean-Claude Juncker, who heads the group of euro-area finance ministers, said the euro is "clearly overvalued" against the dollar and yuan.

"We urged the Chinese to let the yuan appreciate versus the euro because in the long term, it's not possible that the economy, which grows at the fastest pace in the world at the moment, constantly depreciates" its currency, Juncker said at a press conference in Luxembourg on Friday. "We want to change this situation as fast as possible."

The yuan has traded at about 6.83 per dollar since July 2008 after a 21 percent gain in the previous three years. The link of the yuan to the weakening dollar has pushed the Chinese currency down 13 percent versus the euro over the past year, adding to pressure from China's export competitors to let the yuan appreciate.

European Central Bank President Jean-Claude Trichet took a step on December 3 toward removing emergency stimulus measures designed to end the recession, telling reporters in Frankfurt the need had diminished. The main refinancing rate stayed at a record low one percent.