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Thursday August 7, 2008 - 20:08:36 GMT
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FOREX NEWS-Dollar gains on strong housing data, ECB rate view

Thu Aug 7, 2008 4:04pm EDT

(Recasts, updates prices, changes byline)

* Housing data helps boost the dollar

* Euro falls as ECB's Trichet highlights risk to growth

* Dollar index hits highest level in 5-1/2 months

By Vivianne Rodrigues

NEW YORK, Aug 7 (Reuters) - The U.S. dollar rose broadly and hit a 5-1/2-month high against a basket of currencies on Thursday, bolstered by a surprise rise in June home sales and diminished expectations for euro zone interest rate increases.

The gain in pending home sales offset a bleak U.S. jobless claims report, supporting a growing view that the current housing slowdown may be nearing a bottom. The data backed expectations of U.S. rate hikes this year, which has fueled a rebound in the dollar over the past two weeks.

In contrast, European Central Bank President Jean-Claude Trichet, in remarks after the bank held rates at 4.25 percent, said he expects economic growth in the euro zone to weaken substantially this year, even as he sees inflation remaining above the ECB's target. For more details, see [ID:nL7650401]

Following his comments, investors unwound bets for ECB interest rate increases this year, limiting the euro's appeal to global investors.

Nick Bennenbroek, head of foreign exchange strategy, at Wells Fargo in New York, said the kneejerk reaction to Trichet's comments was to buy the dollar and sell the euro, although he believed the ECB chief's statements were balanced.

"Overall, today's price action reflects the market's bias toward buying the dollar. There is a general perception that weakness across other international economies are more pronounced than it was earlier this year, prompting investors to sell foreign currencies and buy the dollar."

The dollar index on the ICE futures exchange rose to as high as 74.604 .DXY, the highest since late February. It was last up 0.3 percent at 74.509.

The euro <EUR=> fell to a seven-week low at $1.5333, down 0.5 percent from late on Wednesday. The dollar rose 0.2 percent against the Swiss franc to 1.0621 francs <CHF=>.

HOME SALES RISE

Data showed on Thursday that U.S. home sales contracts signed in June rose to their highest level since October. For details, see [ID:nN07290813]

"This is the second upside surprise in three months, so it is hard to ignore. Anything which reduces inventory, whether of foreclosed homes or not, is a very welcome development," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, at Valhalla, New York.

"It does not fix the housing market, though, but it might be the beginning of the end of the crash," he said.

The pending home sales data outweighed a report earlier in the session showing the number of U.S. workers filing new claims for jobless benefits rose 7,000 last week to a more than six-year high.

The jobless claims' impact was most evident in the dollar's price action against the yen. The dollar fell 0.3 percent to 109.37 yen <JPY=>, as investors also took profits on the greenback's recent gains.

"The initial claims number was pretty ugly," said Ronald Simpson, managing director of global currency analysis at Action Economics, in Tampa, Florida. "For now, that's going to limit the upside for the dollar."

Further pressuring the dollar was an increase in crude oil prices by more than 1.0 percent to $119.94 per barrel CLc1, after falling to a three-month low on Wednesday.

U.S. stocks were also lower, with investors disappointed by insurer American International Group Inc's (AIG.N: Quote, Profile, Research, Stock Buzz) third straight quarterly loss and weaker-than-expected same-store sales in July at Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz), the world's largest retailer.

"There are still some near-term concern over the economy," added Simpson. "Some of the retail sales numbers that came in today were worse than expected."

Most analysts now expect the dollar to gain in the second half of the year, as the credit crunch showed increasing signs of spreading to the euro zone, Japan, Australia and other major economies.

On the other hand, the United States, the first major casualty of the nearly year-old credit crisis, has garnered support from the decline in oil prices after they hit record highs last month and a generally steady run of U.S. economic data.

Elsewhere, sterling fell to an eight-week low versus the dollar as the Bank of England held rates steady at 5.0 percent as expected. with policy-makers trying to balance slowing growth and rising inflation. Sterling was last down 0.2 percent at $1.9434 <GBP=>. (Additional reporting by Gertrude Chavez-Dreyfuss and Wanfeng Zhou in New York; Editing by Gary Crosse)

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