Dollar Trades Near 7-Week Low Versus Euro as Yield Demand Rises

July 27 (Bloomberg) -- The dollar traded near the lowest level in seven weeks versus the euro before a report economists said will show new home sales rose in the U.S., adding to signs that the global economy is stabilizing.

The Australian dollar approached the highest level in more than three weeks against the yen after Asian stocks extended a global equity rally, adding to evidence investors are shifting to higher-yielding assets. Futures traders increased bets that the euro and Australia’s dollar will gain against the U.S. currency, as the risk appetite increases.

“Expectations that the economy will recover continue to improve,” said Yuji Kameoka, a strategist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-largest brokerage group. “An improvement of risk appetite will keep a lid on the dollar.”

The dollar was at $1.4201 per euro as of 9:51 a.m. in Tokyo from $1.4202 in New York on July 24. It touched $1.4291 on July 23, the weakest level since June 3. The yen was at 134.71 against the euro from 134.63 on July 24. Japan’s currency fetched 94.86 versus the dollar from 94.79.

Australia’s currency was at 77.57 yen from 77.46 yen in New York on July 24. The currency reached 78.04 yen on July 23, the highest since July 2.

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

New Home Sales

The yen fell against 12 out of the 16 most-active currencies tracked by Bloomberg. A U.S. government report will likely show new home sales rose 2.9 percent in June to a 352,000 annual rate, according to a Bloomberg News survey of economists before the release today.

Home prices continue to fall, albeit at a slower pace. The S&P/Case Shiller index of 20 major metropolitan areas, due July 28, will probably show property values fell 17.9 percent in May from a year earlier, according to the median forecast. The measure was down 18.1 percent in the 12 months ended April.

Futures traders increased bets that the Australian dollar will gain against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the currency compared with those on a drop -- so-called net longs -- was 38,788 on July 21, compared with net longs of 25,593 a week earlier.

Rising Stocks

“Rising stocks will make it easier for the currencies of resource-rich nations or higher-yielding countries to attract buyers,” said Masakazu Sato, a foreign exchange adviser at Gaitameonline Co. “The Australian dollar may test 80 yen.”

The MSCI Asia Pacific Index of regional shares rose 0.9 percent, while the Nikkei 225 Stock Average added 1.8 percent.

The difference in the number of wagers on an advance in the euro compared with those on a drop was 34,772 on July 21, compared with net longs of 13,899 a week earlier.

Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of July 21.

Losses in the dollar were tempered after Federal Reserve Chairman Ben S. Bernanke said he supports the Treasury’s “strong dollar policy.”

The dollar also strengthened on speculation foreign investors will buy some of the $115 billion in Treasuries which the U.S. will sell this week. Bernanke’s comments came before U.S. officials including Treasury Secretary Timothy Geithner meet with Chinese counterparts today and tomorrow in Washington to discuss economic and strategic issues.

Reserve Currency

“Bernanke’s remarks may ease worries in China about the dollar as a key reserve currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “His comments are positive for the dollar.”

A stronger U.S. economy would bolster the dollar, Bernanke said yesterday in Kansas City, Missouri, in a town-hall-style meeting taped for broadcast on PBS television this week. He also said he expects the economy to grow at an annual rate of 1 percent in the second half, while unemployment will exceed 10 percent before beginning to decline.