Dollar Little Changed Before Housing, Manufacturing Reports

By Kosuke Goto and Bo Nielsen

July 17 (Bloomberg) -- The dollar was little changed against the euro and yen 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 has fallen more than 1 percent versus the Australian and New Zealand dollars this month on speculation credit-market losses in the U.S. will deepen, undermining the case for the Federal Reserve to raise interest rates. Fed Chairman Ben S. Bernanke told a congressional committee yesterday that growth and inflation risks are increasing and that the housing market is the ``central element'' of the crisis.

``The trend of a weaker dollar won't change,'' said Kazuyuki Kato, a currency trading manager in Tokyo at Mizuho Trust & Banking Co., a unit of Japan's second-largest publicly- traded lender by assets. ``With the U.S. economic outlook deteriorating, I do not expect any rate hike by the Fed this year.''

The dollar traded at $1.5832 per euro at 9:51 a.m. in Tokyo from $1.5827 in New York yesterday. It touched an all-time low of $1.6038 on July 15. The dollar was at 105.11 yen from 105.13 yen yesterday, when it fell to 103.77 yen, the lowest since May 27. The euro traded at 166.41 yen from 166.39 yen.

The U.S. currency may move between $1.5780 and $1.5920 per euro, and 104.50 yen and 105.50 yen today, Kato forecast.

Housing Slump

Housing starts fell to 960,000 in June, the lowest level since 1991, from 975,000 in May, according to the median forecast of 76 economists surveyed by Bloomberg News. 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, compared with minus 17.1 in June, according to a separate Bloomberg survey. Readings less than zero signal a decline. The bank will release the report at 11 a.m. in New York.

The New Zealand dollar rose the most in two months against the yen as a rally in U.S. stocks encouraged investors to buy higher-yielding assets. New Zealand's currency appreciated 1 percent to 81.04 yen, from 80.21 in late Asian trading yesterday. The benchmark interest rate in New Zealand is 8.25 percent, compared with 0.5 percent in Japan.

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

`Pressure Remains'

Global banks and securities firms have reported losses and writedowns of more than $400 billion related to subprime mortgages. Merrill Lynch & Co. and JPMorgan Chase & Co. report 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.''

Some of the world's largest sovereign wealth funds are looking to reduce their dollar holdings, the Financial Times reported today, without saying where it obtained the information. One large sovereign fund in the Gulf has cut back its dollar- denominated holdings to less than 60 percent from more than 80 percent a year ago, the paper reported.

Bearish on Dollar

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.

The bearish outlook is consistent with expectations of futures traders, who are placing less of a chance that the U.S. central bank will raise borrowing costs this year.

JPMorgan Chase & Co., the third-largest U.S. bank, predicted the Federal Reserve 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.

Fed funds futures on the Chicago Board of Trade show a 41 percent chance the central bank will increase its 2 percent target lending rate by a quarter-percentage point at its Dec. 16 meeting, down from 44 percent odds a week ago.

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

`No Bias'

The U.S. currency has given up gains made versus the euro since July 3, when European Central Bank President Jean-ClaudeTrichet said he had ``no bias'' on future interest-rate moves after increasing the main refinancing rate to 4.25 percent.

The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since lost 0.8 percent on concern losses will deepen at Fannie Mae and Freddie Mac, the two largest buyers of U.S. mortgages.

``The bad news in the U.S. is very much priced in already,'' said Adam Fazio, a currency strategist at CIBC World Markets Inc. in New York. ``The market is becoming punch-drunk to negative news out of the U.S. while the bad news out of Europe is just starting to come out. The euro is at such lofty levels.''

German investor and analyst confidence declined this month to the lowest level since data began in 1991, the ZEW Center for European Economic Research in Mannheim said this week.

The Dollar Index on the ICE market traded at 72.069 from 72.064 yesterday when it touched 71.508, the lowest since April 23.

To contact the reporters on this story: Kosuke Goto in Tokyo at at kgoto2@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net