Dollar Falls Against Euro Before Housing, Manufacturing Reports

By Agnes Lovasz and Kosuke Goto

July 17 (Bloomberg) -- The dollar fell against the euro before reports that may show U.S. housing starts declined to a 17-year low and manufacturing contracted for an eighth month.

The U.S. currency traded close to the lowest in almost two months against the yen on speculation credit-market losses in the U.S. will deepen, undermining the case for the Federal Reserve to raise interest rates. The Chinese yuan fell the most in seven weeks on expectations the government will slow the currency's gains to help exporters weather the global slump.

``The sentiment towards the dollar is very negative,'' said Lee Ferridge, a senior foreign-exchange strategist in London at State Street Global Markets. ``The housing starts aren't going to be good numbers. The Fed is focusing back on the growth issue and real economic numbers are going to have more of an impact. Investors are selling the dollar again.''

The dollar weakened to $1.5854 per euro as of 8:46 a.m. in London, from $1.5827 in New York yesterday. It touched an all- time low of $1.6038 two days ago. It traded at 105.46 yen, from 105.13 yen yesterday, when it weakened to 103.77 yen, the lowest since May 27. The euro traded at 167.21 yen, from 166.39 yen.

The U.S. currency will probably break its record low versus the euro in coming days and fall to $1.65 during the next few months, Ferridge said

The yuan declined to 6.8270 per dollar, from 6.8113 yesterday.

Australian Dollar

The Australian dollar fell for a second day as investors added to bets the central bank will reduce interest rates in coming months. The Australian currency dropped to 97.66 U.S. cents, from 97.84 cents yesterday, when it reached 98.49 cents, the highest since 1983. Reserve Bank of Australia Governor Glenn Stevens signaled yesterday that the nation's borrowing costs are high enough to curb inflation.

Fed Chairman Ben S. Bernanke told lawmakers yesterday that growth and inflation risks are increasing and the housing market is the ``central element'' of the crisis.

Housing starts fell to a 960,000 annual pace last month, the weakest since March 1991, from 975,000 in May, according to the median of 76 forecasts in a Bloomberg News survey. The Department of Commerce report is due at 8:30 a.m. New York time.

The Fed Bank of Philadelphia's general economic index will be minus 15 in July, from minus 17.1 in June, according to a separate Bloomberg survey. Readings less than zero signal a decline. The bank releases the report at 10 a.m. in New York.

The dollar also fell after the Financial Times reported the world's largest sovereign wealth funds are looking to reduce their holdings of U.S. dollars in a sign of concern about the currency, said Yuji Saito at Societe Generale SA.

Sovereign Wealth Funds

``The news made us think that not only institutional money managers and individual investors but also governments are shifting away from dollar-denominated assets,'' said Saito, head of foreign-exchange sales at the Tokyo unit of France's second- largest bank by market value. ``I am dollar-bearish.''

The U.S. currency may fall to 104.50 yen and $1.5920 a euro today, Saito forecast.

One large sovereign fund in the Gulf has cut back its dollar-denominated holdings to less than 60 percent from over 80 percent a year earlier, the FT reported, without saying where it obtained the information.

The dollar and U.S. stocks advanced yesterday as the oil price fell and lender Wells Fargo & Co., which has avoided the worst of the fallout from the subprime-mortgage market's collapse, reported earnings that beat analyst estimates. The Standard & Poor's 500 Index rose for the first time in four days, gaining 2.5 percent. Crude oil for August delivery slid 3 percent to $134.60 a barrel.

`Wall Street Banks'

Global banks and securities firms have reported losses and writedowns of more than $420 billion related to subprime mortgages. Merrill Lynch & Co. and JPMorgan Chase & Co. announce earnings today and Citigroup Inc., the biggest U.S. bank, publishes its tomorrow.

``Wall Street banks could still lose a lot more money,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``The dollar has the potential to head lower as its problems are deep-rooted.''

U.S. investors turned bearish on the dollar for the first time in three months, a survey of Bloomberg customers showed.

The dollar will weaken against the euro, yen, Brazilian real and Swiss franc in the next six months as confidence in Fed and Treasury efforts to keep the economy out of a recession fades, according to respondents in the monthly Bloomberg Professional Global Confidence Index, which questioned 5,450 customers from Los Angeles to Paris to Tokyo.

JPMorgan, the third-largest U.S. bank, predicted the Fed will keep borrowing costs on hold this year and raise rates in the first quarter, a change from its previous estimate for higher rates in September.

Interest-Rate Futures

Fed funds futures on the Chicago Board of Trade showed a 21 percent chance the central bank will increase its 2 percent target rate for overnight bank loans by a quarter-point at its Dec. 16 meeting, down from 24 percent odds the previous day.

Anything that can be done to strengthen the housing market ``would be beneficial,'' Bernanke told the House Financial Services Committee in Washington yesterday.

The Dollar Index on the ICE market fell to 71.927, from 72.064 yesterday, when it touched 71.508, the lowest level since April 23.

Yen sales by Japanese individual investors on the Tokyo Financial Exchange climbed to the highest since August for a second day yesterday as gains in the currency made higher- yielding assets abroad cheaper.

Net short positions on the yen against seven major currencies, including the U.S. dollar and the Australian dollar, rose to 362,619 contracts among so-called mom-and-pop traders yesterday, the highest since Aug. 14, data showed. The contracts are denominated in 10,000 units of the foreign currency.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Kosuke Goto in Tokyo at at kgoto2@bloomberg.net