Dollar Trades Low Against Euro, Housing Slump Cuts Confidence

May 26 2008 - The dollar traded near a one-month low against the euro on speculation U.S. reports tomorrow will show a slump in home prices accelerated and consumers were the most pessimistic in at least 15 years.

Traders are betting the Federal Reserve won’t raise interest rates this year, after seven reductions since September, as the European Central Bank keeps rates unchanged. The U.S. currency held near a 25-year low against the Australian dollar and a three-week low against the British pound.

“The dollar will keep sliding amid the slowing U.S. economy,” said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest financial group. “Weaker data will force the Federal Reserve to lower interest rates further.”

The dollar slid to $1.5780 against the euro at 10:40 a.m. in Tokyo from $1.5762 late in New York on May 23. It fell to a one-month low of $1.5814 a euro on May 22. The dollar bought 103.24 yen from 103.38. The euro traded at 162.92 yen from 162.95 yen.

The dollar may move between 102.90 yen and 103.60 yen today, Kato forecast. Currency trading may be subdued today as financial markets in the U.K. and the U.S. are closed for a public holiday, he said.

The U.S. currency traded at 95.98 cents per Australian dollar from 95.92. Against the pound, the dollar was at $1.9824 from $1.9798. The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, fell to 71.888 today from 71.899 on May 23. The U.S. currency traded at 1.0244 versus the Swiss franc from 1.0241.

Won, Yuan

South Korea’s won, the worst performer of the world’s 16 most-traded major currencies this year, traded near a 19-month low against the dollar on speculation local refineries will increase purchases of the U.S. currency after oil rose to a record last week. The currency traded at 1,048.95 per dollar, compared with 1,047.60 late last week.

The Chinese yuan rose to 6.9380 per dollar, the strongest since a peg to the dollar was scrapped in July 2005.

A report from S&P/Case-Shiller due tomorrow may show home prices in 20 U.S. metropolitan areas declined 14.2 percent in March from a year earlier, the most since the figures were first published in 2001, according to a Bloomberg News survey. The gauge has fallen every month since January 2007.

The Conference Board confidence index, due also tomorrow, fell to 60 in May, the lowest since August 1993, from 62.3 in April, according to a separate Bloomberg survey of economists.

Federal Reserve Outlook

Futures on the Chicago Board of Trade showed a 42 percent likelihood that the Fed will hold its target lending rate at 2 percent this year on May 23, up from 31 percent a day earlier. The odds for a quarter point increase fell to 39 percent from 42 percent.

The yield advantage of German two-year debt over U.S. bonds of a similar maturity, among the securities most sensitive to interest-rate expectations, rose to 1.7758 percentage points on May 23, the highest since March 31.

The euro may be supported by speculation the 15 countries that share the currency are strong enough to withstand a slowdown in the U.S., allowing the European Central Bank to keep interest rates on hold to fight inflation.

Consumer prices in the euro region rose 3.5 percent in May, faster than the 3.3 percent gain in the previous month, according to a Bloomberg News survey. The statistics office will release the data on May 30. Data one day earlier will probably show unemployment in Germany, Europe’s largest economy, declined for the 28th month in May, according to a separate survey.

Interest Rate Forecasts

JPMorgan Chase & Co., the third-largest U.S. bank, doesn’t expect the ECB to lower rates this year, according to a research note published last week. That’s a change from its previous forecast for rate cuts in November and February. Royal Bank of Scotland Plc, the U.K.’s second-biggest bank, last week pushed back its forecast for a reduction in rates to the second quarter of next year from the third quarter of 2008.

Bank of America Corp., the second-largest U.S. bank, abandoned its prediction for a rate cut at the end of this year and now expects the ECB to raise borrowing costs at the middle of 2009, according to a May 23 research note.

“Economic data from Europe suggest there’s a decreasing chance that the euro will fall,” currency strategists led by Tohru Sasaki in Tokyo at JPMorgan & Chase wrote.

Dollar Trades Near One-Month Low; Housing Slump Cuts Confidence
by Kosuke Goto and Stanley White | Bloomberg