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Wednesday August 23, 2006 - 23:20:30 GMT
Reuters - www.reuters.com

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FOREX-Dollar inches up vs euro despite soft housing data

FOREX-Dollar inches up vs euro despite soft housing data
Wed Aug 23, 2006 4:28pm ET(Updates prices)
By Steven C. Johnson

NEW YORK, Aug 23 (Reuters) - The dollar edged higher versus the euro on Wednesday, with investors trimming bets against the greenback even as data showed a sharp decline in U.S. existing home sales last month.
The dollar initially slipped to session lows versus its main rivals on news that July home sales tumbled to their lowest level since January 2004 -- more evidence suggesting the once-booming housing market is slowing and may curb U.S. growth.

But with bets against the dollar piling up over recent weeks, selling momentum soon dried up as investors liquidated euro holdings and moved back into the U.S. currency.

Traders said it all provided a nice excuse to take profits on the single currency's 3 percent gain against the dollar since mid-July.
"What's really driving the market is positioning, and in a summer market, when things lean a little too far one way, all you need is for a couple of funds or speculative accounts to come in and decide to take it the other way," said Grant Wilson, senior trader at Mellon Bank in Pittsburgh.

After trading as high as $1.2852 after the housing report, the euro was at $1.2789 , down slightly from $1.2803 late Tuesday, according to Bridge data. The dollar was lower at 116.32 yen , from 116.51 yen. The euro was at 148.83 yen , below 149.21 yen on Tuesday.
Sterling was at $1.8933 , from $1.8881, while the dollar was flat at 1.2343 Swiss francs .

Wilson said the euro looks set to remain in its recent $1.27-$1.29 range, at least until the market gets a look at July jobs and manufacturing data next week.

There are a few stops below near-term euro support at $1.2780, he added, but "we're not having great success in tripping those."

SHORT-LIVED GAINS

Some analysts said the dollar was able to shrug off the housing data because investors focused on a component showing a rise in the median home price.

But others noted that the marginal recovery in the U.S. currency may be short-lived, especially given the accumulating evidence of a housing decline.

Years of rapid home price appreciation has been the main driver of U.S. growth, and signs that the sector is cooling have led some economists to predict the Federal Reserve could cut interest rates sometime in 2007. For more details on the housing data, see [nWBT005838].

Lower interest rates make dollar-denominated securities less attractive to investors.

Wednesday's housing data "was a disastrous set of numbers," said David Mozina, head of foreign exchange strategy at Lehman Brothers in New York, that is "consistent with our position to remain short dollars."

Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York, said, "The markets are already leaning toward pricing in rate cuts in the first quarter of next year. Today's number just feeds that story."

After bumping up rates 17 straight times, the Fed kept the funds rate steady at 5.25 percent earlier this month, saying slower U.S. growth would help moderate price pressures.

Meanwhile, analysts say the market remained confident the European Central Bank would tighten credit further after pushing rates to 3 percent earlier this month.

A report on U.S. new home sales for July is set for release on Thursday.

(Additional reporting by Nick Olivari in New York)

© Reuters 2006. All Rights Reserved.

 

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