FOREX NEWS -Dollar dips on Fannie results, outlook uncertain
Tue May 6, 2008 4:21pm EDT
(Updates prices, adds comment, byline)
By Steven C. Johnson
NEW YORK, May 6 (Reuters) - The dollar edged lower against the euro and yen on Tuesday, its second straight daily decline, after a bigger-than-expected quarterly loss at Fannie Mae (FNM.N: Quote, Profile, Research) suggested more financial market turmoil ahead.
Fannie Mae (FNM.N: Quote, Profile, Research), the largest provider of U.S. home financing, posted a $2.19 billion loss in the first quarter as the housing market took a turn for the worse. For details, see [ID:nN06456763].
Analysts said that was worrisome for the dollar because it suggested problems in the troubled U.S. housing sector have yet to work their way through the economy.
Should those problems lead to more job losses and slower consumer spending, the Federal Reserve may be forced to cut interest rates again, dulling the dollar's appeal to global investors.
"When we look at how the U.S. housing crisis is unfolding, we believe the problem is going to remain with us for a number of quarters," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
That has left the market "uncertain about where to take the dollar," he added. "Until two weeks ago, the theme was broad dollar weakness. Things have turned now, but traders are unsure whether they should push this rally any further."
Late in New York, the euro was 0.2 percent higher on the day at $1.5525 <EUR=>. Last week, the dollar rose against the euro, boosted by better-than-expected first-quarter U.S. growth and a smaller-than-expected monthly job loss in April.
The dollar index .DXY fell 0.2 percent to 73.015. The dollar also edged down 0.2 percent to 104.69 yen <JPY=>.
The greenback fell 1 percent against the Canadian dollar to C$1.0026 <CAD=>. Traders said oil's surge to a fresh record above $122 a barrel CLc1 was boosting the Canadian currency.
The euro also drew support from euro zone service sector data that was slightly stronger than expected.
The data "gives credence to the view that the euro zone economy is slowing but holding up pretty well in the face of downside risks to global economic growth," said JPMorgan G10 currency strategist Kamal Sharma.
Record high oil prices were seen reinforcing the European Central Bank's focus on inflation, which bank President Jean-Claude Trichet on Monday termed a "significant" risk.
This underlined expectations that the central bank would keep rates at 4 percent when it meets on Thursday.
Analysts also broadly expected the ECB to stick with its hawkish line on inflation in Trichet's post-meeting briefing on Thursday, despite a recent run of soft data. But some felt a psychological change in perceptions was already under way.
Strauss said any sign of emphasis on downside growth risks would lead to renewed euro selling against the dollar and could foreshadow a sharp move back below $1.50 over coming months.
The euro ended 2007 at $1.4589 but rallied sharply during the first four months of this year, hitting a record peak above $1.60 late last month before retreating a bit.
The Australian dollar rose 0.3 percent to $0.9498 <AUD=>, having retreated from a two-week high after the Reserve Bank of Australia held its key cash rate at a 12-year high of 7.25 percent and underlined its concern about demand. (Additional reporting by Nick Olivari; Editing by Jonathan Oatis)
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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