Dollar May Decline Versus Euro as U.S. Rate Optimism Weakens

Dec. 24 (Bloomberg) -- The dollar may extend its decline from almost the strongest level since September on speculation that the Federal Reserve won’t seek an early exit from stimulus measures.

The greenback may fall for a second day against the 16- nation euro after a report showed sales of new homes in the U.S. unexpectedly fell last month and before a report next week forecast to show a decline in business activity. The yen traded near the weakest level in eight weeks on prospects the Bank of Japan may prolong credit easing to fend off deflation.

“The U.S. data failed to brighten prospects of the economy there,” said Masashi Nakamura, senior economist in Tokyo at Mizuho Research Institute Ltd. “The dollar won’t gain additional traction.”

The dollar traded at $1.4336 per euro at 8:36 a.m. in Tokyo from $1.4337 yesterday in New York. It rose to $1.4218 on Dec. 22, the strongest level since Sept. 4. The dollar was at 91.64 yen from 91.64 yen yesterday. The greenback traded at intraday highs of 91.87 yen in the past two days, the strongest since Oct. 27. The euro was at 131.37 yen from 131.38 yen in New York.

The dollar had rallied more than 5 percent this month versus the euro and traded within a quarter-cent of its 200-day moving average of $1.4198 before yesterday’s decline. The dollar is down 2.5 percent in 2009.

Housing Decline

Sales of new homes in the U.S. decreased 11 percent in November to an annual pace of 355,000 from a revised 400,000, the Commerce Department reported yesterday. The median estimate of 72 economists in a Bloomberg survey was for an increase to 438,000 from a previously reported 430,000.

The Institute for Supply Management-Chicago Inc. will report on Dec. 30 its barometer of U.S. business activity fell to 55.1 in December from 56.1 in the previous month, according to a Bloomberg News survey of economists. Readings above 50 signal expansion.

“People are taking the opportunity from the good U.S. data to buy some dollars before year-end,” said Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., the world’s largest custodian of assets. “But the big picture hasn’t changed, and the Federal Reserve has been pretty clear about its intentions to keep rates low, so we expect the dollar to come under pressure again.”

Dollar Reserves

Futures trading in Chicago indicated a 48 percent chance that policy makers will increase the zero to 0.25 percent target rate for overnight lending between banks by at least a quarter- percentage point by the June meeting, down from a 52 percent likelihood a week ago.

Central banks reduced purchases of U.S. dollars in the third quarter, possibly cutting them to a record low of less than 30 percent of new foreign-exchange reserves, Barclays Capital said in a note to clients.

Global central banks probably bought $50 billion in the quarter, out of some $250 billion of reserves that were added in the period through transactions, Barclays said, citing calculations based on data from the International Monetary Fund and U.S. official reports.

The U.S. currency has appreciated 5.7 percent versus the euro from this year’s weakest level of $1.5144 reached on Nov. 25. Before the Dec. 4 payrolls report showed an unexpected drop in the unemployment rate, the greenback had fallen 17 percent from the 2009 peak reached in March as investors bought higher- yielding assets with borrowed dollars.

Orders for goods meant to last several years increased 0.5 percent in November, after falling 0.6 percent in the previous month, according to the median estimate of 72 economists in a Bloomberg survey. The Commerce Department report is due today.

Consumer Prices

The yen may weaken again after snapping a six-day decline against the dollar yesterday, the longest losing streak since January 2007, on speculation that strong deflationary pressure will force the Bank of Japan to stand pat on rates.

BOJ Governor Masaaki Shirakawa said this week the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation. The central bank on Dec. 18 said it won’t tolerate a year-on-year rate of change in consumer prices “equal to or below zero percent,” while holding its key overnight rate at 0.1 percent.

Consumer prices excluding fresh food fell 1.8 percent in November from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the statistics bureau releases the data tomorrow in Tokyo.