Dollar Falls as Reports May Show Housing Slump Slowing Economy
By Chris Young and Ron Harui
Feb. 26 (Bloomberg) -- The dollar traded near the lowest in almost two months against the euro on speculation reports will show a housing slump is slowing the U.S. economy.
The U.S. dollar declined against 13 of the 16 most-active currencies before reports this week that may show fourth-quarter growth was less than previously estimated, new home sales dropped and durable goods orders slipped. The difference in yield between benchmark 10-year U.S. and German debt last week narrowed to the least in almost two years.
``There's more concern about the U.S. economy,'' said Mitul Kotecha, head of global currency research in London at Calyon, the securities unit of Credit Agricole SA, France's second- biggest bank by assets. ``We're going to see renewed signs of softening in the housing market. That's negative for the dollar.''
The dollar declined to $1.3184 per euro at 7:46 a.m. in London, after reaching $1.3199, the weakest since Jan. 3, from $1.3166 late in New York on Feb. 23. It also dropped to 120.87 yen from 121.08. It may fall to $1.36 against the euro by the middle of this year, Kotecha said.
The Fed's target overnight lending rate between banks of 5.25 percent is 1.75 percentage points higher than the European Central Bank's.
The yield premium investors earn on 10-year U.S. Treasuries over similar-maturity German bunds reached 0.613 percentage point on Feb. 20, the smallest since March 2005. It was 0.637 percentage point today.
A survey sponsored by Royal Bank of Scotland Group Plc showed 19 of 47 central banks cut the share of dollars in reserves and 21 have increased holdings of euros. Sixty-nine percent said they were looking for more yield.
Currency Options
The Commerce Department will say tomorrow orders for U.S. durable goods fell 3 percent in January, a Bloomberg News survey showed. Reports the following day will show the economy grew 2.3 percent last quarter, from the 3.5 percent the government reported last month and sales of new homes declined 3.6 percent in January, separate surveys showed.
Losses in the U.S. currency may be limited as some traders buy to protect options that would become worthless should the dollar weaken beyond $1.3200 per euro, said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.
``There's talk of buying interest between $1.3190 and $1.3200 to defend options with $1.3200 triggers,'' Soma said. ``These bids may stem the dollar's decline.'' Options give holders the right to buy or sell a currency at a set price at a fixed future date.
Heading South
The euro pared gains against the dollar after a German report showed consumer confidence in Europe's largest economy fell for a fourth month in March.
GfK AG's confidence index dropped to 4.4 from a revised 4.9, the Nuremberg-based market research company said today.
``The euro is heading south after the release of the Gfk report,'' said Noriyuki Kato, head of foreign-exchange at State Street Bank & Trust Co. in Tokyo. ``The move is accelerating, especially after the euro failed to break through $1.32 option barriers.''
Investors trimmed bets on further ECB rate increases this year, to 4 percent from 3.5 percent currently. The yield on the three-month Euribor interest-rate futures contract for December declined to 4.145 percent today from 4.175 percent on Feb. 22.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.
Sense of Security
The yen may fall 4 percent to 126 a dollar by the end of June because the Bank of Japan won't raise rates before the fourth quarter, said Deutsche Bank AG, the world's biggest currency trader.
Japan's currency remained higher after minutes of the Bank of Japan's January meeting showed policy makers decided against raising rates, preferring to examine more data.
The central bank voted 8-1 on Feb. 21 to increase its key overnight lending rate to 0.5 percent from 0.25 percent. Governor Toshihiko Fukui last week said the bank will keep borrowing costs ``very low'' for some time.
``There will be no additional rate increases by the BOJ at least in the coming six months,'' Koji Fukaya, senior currency strategist in Tokyo at Deutsche Bank, said in an interview today. ``Interest-rate differentials meantime will provide an environment where investors can sell yen with a sense of security.''
The New Zealand dollar rose the most against the yen today, climbing to 85.70 yen from 85.62. New Zealand business confidence climbed to a three-year high in February and imports unexpectedly gained in January, suggesting the central bank will raise interest rates from 7.25 percent next week.
To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: February 26, 2007 02:48 EST
