Dollar May Extend Losses as Housing Report Pares Safety Demand

April 23 (Bloomberg) -- The dollar may extend its decline against higher-yielding currencies on speculation an unexpected increase in U.S. home prices in February pared demand for the safety of the world’s main reserve currency.

The pound traded near a three-week low against the dollar after Chancellor of the Exchequer Alistair Darling said yesterday the U.K. will borrow 269 billion pounds ($390 billion) more than previously forecast and increase income taxes as the worst slump since World War II saps revenue.

“An improvement of risk appetite supports capital inflow into the currencies of emerging markets,” said Masashi Hashimoto, senior foreign exchange analyst in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest lender. This will reduce demand for the dollar and the yen, he said.

The dollar traded at $1.3004 per euro as of 8:18 a.m. in Tokyo from 1.3005 in New York yesterday when it touched $1.2886, the strongest level since March 16. The U.S. currency was at 98.09 yen from 98.01 yesterday. The yen traded at 127.56 per euro from 127.48.

The Dollar Index, which the ICE uses to track against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.5 percent to 86.119 yesterday.

U.S. home prices rose 0.7 percent in February after a 1 percent gain in January, the first consecutive monthly increases since 2007, the Federal Housing Finance Agency said yesterday.

The pound traded at $1.4483 from 1.4492 yesterday when it lost 1.2 percent as Darling told Parliament the U.K. economy will shrink by 3.5 percent this year, more than twice the estimate in November.

U.K.’s Deficit

The U.K.’s deficit will total 703 billion pounds during five fiscal years through April 2014, compared with 434 billion pounds forecast in November, Darling said in his annual budget statement. This year’s shortfall of 175 billion pounds, or 12.4 percent of gross domestic product, is the biggest in the Group of 20 nations and more than the 12 percent expected in the U.S.

“I am turning 180 percent on my sterling-bullish call,” Neil Jones, head of European hedge fund sales in London at Mizuho Corporate Bank Ltd., wrote in a research note to clients yesterday. “Investment will exit the U.K. economy in search of lower tax regimes.”

Demand for the dollar and yen may increase on concern government “stress tests” in the U.S. will reveal weakness in banks, sapping optimism the global slump may ease.

Bank Losses

Morgan Stanley, the fifth-biggest bank by assets posted a larger-than-expected loss yesterday, while Wells Fargo & Co. Chief Financial Officer Howard Atkins said “credit may not have turned yet.”

The Federal Reserve plans to release results of stress tests on banks on May 4. These are being undertaken to determine whether the companies have enough capital to cover losses over the next two years should the recession worsen.

The International Monetary Fund said in a forecast released yesterday that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent estimate.