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Tuesday April 10, 2007 - 21:10:23 GMT
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FOREX NEWS-Dollar slumps, hurt by housing, trade woes

FOREX -Dollar slumps, hurt by housing, trade woes
Tue Apr 10, 2007 5:00pm "
(Updates prices, adds quote, changes byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 10 (Reuters) - The dollar sank to a two-year low against the euro on Tuesday on persistent worries about the health of the U.S. housing market and concerns a trade dispute between the United States and China is escalating.

Investors sold the dollar, nagged by concerns that weakness in the U.S. housing market may be broadening after American Home Mortgage Investment Corp. (AHM.N: Quote, Profile , Research) lowered its earnings forecast, which dragged its shares down.

Dollar bears are betting a weaker housing market will prompt the Federal Reserve to cut interest rates as early as mid-year, reducing the greenback's appeal to global investors.

As liquidity returned to the market after the Easter holidays, an intensifying trade dispute between China and the United States also hurt the dollar, traders said. The United States on Tuesday accused China at the World Trade Organization of piracy and blocking access to U.S. films, books and software.

"We're back into some of the themes that we have been focusing on for some time such as worries about the housing sector in the U.S., along with a possible interest rate cut maybe by the fall," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto. "So all those factors are pushing for a weaker dollar.

"Trade protectionism is also starting to worry other people. That is certainly viewed as a negative for the U.S. economy," he added.

The yen hit a record low against the euro after the Bank of Japan left rates on hold at 0.5 percent -- the lowest in the industrialized world -- and gave no sign rates will rise soon.

The euro rose as high as 160.10 yen on the EBS electronic trading system, a record since the currency's launch in 1999. By late afternoon in New York, it traded back down to 159.98 yen. The dollar was down 0.2 percent at 119.11 yen , off a six-week high of 119.39.
Against the dollar, the euro was up 0.5 percent at $1.3425 , after climbing to a peak of $1.3457, the highest level since March 2005.

The next key event for the market will be the minutes of the Federal Open Market Committee's March meeting, which are due on Wednesday.

The minutes should provide some details behind the wording change in the Fed statement from last month's meeting. The Fed left rates on hold at 5.25 percent, but dropped a phrase in its statement pointing to future monetary policy tightening.

"I don't think the dollar is vulnerable to a sell-off even if there is a dovish hint to the minutes," said David Powell, senior currency strategist at IDEAglobal in New York.

"The market's dovish interpretation after the release of the minutes has kind of dissipated after some hawkish comments from the FOMC members about inflationary risks. Fisher is just the latest in the long of line of Fed officials who has raised concern about inflation," he added.

Dallas Federal Reserve Bank President Richard Fisher said on Tuesday policy-makers have "more work to do" to ensure that inflation does not run too high.

Investors will also be focused on the European Central Bank monetary policy meeting this week. Markets are expecting the ECB to hold rates steady at 3.75 percent on Thursday before raising them again this year, perhaps in June or sooner.

Analysts said the market would be on the lookout for any signals from ECB President Jean-Claude Trichet a rate hike is imminent, which would likely buoy the euro.

Meanwhile, one of the day's biggest gainers was the Australian dollar, which rose to its highest since 1990 against the greenback as robust domestic economic data boosted expectations for another rise in Australian rates next month.

The Aussie dollar was up 1.2 percent at US$0.8255 after touching a peak of about US$0.8266, also gaining support from news Australia's Rinker Group (RIN.AX: Quote, Profile , Research) had told its shareholders to accept a $14 billion Mexican takeover bid.

The New Zealand dollar followed suit, rising 1.3 percent to US$0.7305, the highest in almost two years. Late afternoon in New York, the currency was trading at US$0.7296 .

© Reuters 2007. All Rights Reserved.


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