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Thursday August 24, 2006 - 20:36:43 GMT
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FOREX-Dollar moves higher despite U.S. home sales decline

FOREX-Dollar moves higher despite U.S. home sales decline
Thu Aug 24, 2006 4:25pm ET

By Steven C. Johnson
NEW YORK, Aug 24 (Reuters) - News of a decline in new home sales failed to dent sentiment toward the dollar on Thursday as the greenback gained on the major currencies.

Traders said the market overbought euros earlier in the session after a rosy reading of the German business climate by research institute Ifo suggested more euro zone interest rate hikes.

That helped explain why a 4.3 percent decline in new home sales in July failed to spark more dollar selling.

A slower housing market is seen as a harbinger of a broader economic slowdown, which could keep the Federal Reserve from raising interest rates further, thus blunting the dollar's appeal to investors.

"Everyone is so heavily long euros there is nobody left to buy it," said Richard Franulovich, senior currency strategist at Westpac in New York. "Even the bounce post-Ifo was not as strong as what you might expect. I think we might be heading for a pretty decent pullback in the euro."

Late afternoon in New York, the euro was down 0.2 percent at $1.2759 , near a North American session low of $1.2750. Earlier in the global session it had climbed as high as $1.2839. The single currency hit a two-month high of $1.2940 on Monday.

The dollar was up 0.2 percent at 116.52 yen , while the single currency was 0.1 percent lower at 148.67 yen .

Analysts said Friday's scheduled speech by Federal Reserve Chairman Ben Bernanke provided further reason for traders to carve out more neutral currency positions.

Though few expect new clues from the Fed chief on the path of U.S. interest rates, traders are mindful of remarks earlier this week by Chicago Fed President Michael Moskow, who said more rate hikes may be needed to cut inflation.

After 17 straight interest rate hikes dating back to mid-2004, the Fed kept the benchmark fed funds rate unchanged at 5.25 percent earlier this month, noting that slower growth could ease inflation.


Some strategists said the U.S. housing data, though weak, was still not conclusive enough to spark heavy dollar selling.

Evidence of slower housing growth is starting to pile up, and investors and economists alike fear that could put the brakes on U.S. growth and weaken the dollar further. On Wednesday, data also showed fewer existing home sales in July.

But Kathy Lien, chief currency strategist at Forex Capital Markets in New York, said, "The dollar hasn't reacted much to the existing and new home sales data this week because we haven't seen it trickle down into retail sales yet.

"We still need to see a contraction in retail sales before the market starts to get really worried," she said.

Retail sales reported two weeks ago hit the highest level since January, Lien noted.

A separate report, however, showing solid July durable goods orders excluding transportation gave the dollar a mild boost, bolstering optimism that there's still some juice left in the U.S. economy.

"I think the idea of a housing slowdown has been well absorbed by investors, so in a sense it's not news. But the details of the durable good report were more of a surprise," said Nick Bennenbroek, currency strategist at Brown Brothers Harriman in New York.

FXCM's Lien said the euro/dollar is probably trapped in the $1.27 to $1.29 range between now and the U.S. Labor Day holiday in early September.
(Additional reporting by Nick Olivari, David McMahon and Kevin Plumberg in New York)

© Reuters 2006. All Rights Reserved.


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