Dollar Trades Near 1-Week Low Against Euro Before Housing Data

By Kosuke Goto

July 29 (Bloomberg) -- The dollar traded near a one-week low against the euro on speculation an industry report today will show the U.S. housing slump deepened, increasing the risk credit-market losses will widen.

Signs of a weakening economy may deter the Federal Reserve from increasing borrowing costs this year, diminishing the allure of dollar-denominated assets. The greenback snapped a five-day advance versus the Canadian dollar after the International Monetary Fund said there's no end in sight to the U.S. housing recession, while the Bush administration forecast a record $482 billion budget deficit next year.

``I still remain super dollar-bearish,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``As long as housing prices are plunging, the U.S cannot pull the economy out of its slump. Systemic risks of a credit crisis still prevail.''

The dollar traded at $1.5746 per euro at 10:55 a.m. in Tokyo, from $1.5741 late yesterday in New York and near a July 23 low of $1.5798. The U.S. currency traded at 107.38 yen from 107.46 yesterday, and C$1.0215 against the Canadian dollar from C$1.0226. The euro was at 169.09 yen from 169.17.

The U.S. currency may fall to $1.58 a euro and 107 yen today, Kato forecast.

China's yuan advanced by the most in two weeks after central bank Governor Zhou Xiaochuan underscored policy ``continuity and stability,'' spurring speculation that China will let the currency rise further to stem inflation. It climbed 0.2 percent to 6.8271 per dollar.

U.S. home prices in the S&P/Case-Shiller index fell 16 percent in May from a year ago, the most on record, according to the median forecast of economists surveyed by Bloomberg News. The report is due at 9 a.m. New York time.

Prolonged Slowdown

A ``bottom'' in the U.S. housing recession is ``not visible,'' said the IMF, which warned in a report that deteriorating credit conditions for consumers and banks may prolong a period of slow growth.

Merrill Lynch & Co. said it will have $5.7 billion of pretax writedowns in the third quarter because of additional losses on the sale of collateralized debt obligations and hedging contracts with bond insurers.

U.S. stocks and the dollar fell yesterday even after U.S. Treasury Secretary Henry Paulson stepped up his push to create a new market for mortgage financing, releasing guidelines for issuers of covered bonds. He said yesterday covered bonds will help provide financing to a U.S. mortgage market that now depends on Fannie Mae and Freddie Mac and other government- linked institutions for more than 70 percent of funds.

`Thin Ice'

``It's as if the dollar is on cracking, thin ice,'' Toru Umemoto, chief currency strategist at Barclays Capital Inc. in Tokyo, a unit of the U.K.'s third-biggest bank, wrote in a research note today. ``Paulson's proposal on covered bonds as a new source of mortgage financing failed to buoy stock prices.''

The dollar may fall to $1.60 per euro this quarter, Umemoto forecast.

Nonfarm payrolls dropped by 75,000 in July, following a decline of 62,000 in June, according to a Bloomberg survey. The Labor Department will release the employment data Aug. 1.

The dollar depreciated to an all-time low of $1.6038 per euro on July 15 on concern financial losses and record oil prices may prolong the economic slowdown in the U.S.

Futures on the Chicago Board of Trade showed yesterday a 38 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, compared with 41 percent odds a week earlier. Policy makers next meet Aug. 5.

Yields Fell

The yield on the two-year Treasury note dropped 14 basis points, or 0.14 percentage point, to 2.57 percent yesterday. 1.77 percentage points lower than comparable-maturity German notes. The yield gap widened from 1.71 percentage points on July 25, making the U.S. securities less attractive to investors.

Fed Governor Frederic Mishkin said yesterday that the economy has faced ``a perfect storm of shocks,'' with rising energy prices and a financial crisis. Mishkin made the comments after a speech in Washington.

``The weak financial sector continues to weigh more heavily on the U.S. dollar, given that the U.S. remains the centre of the housing market problem,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a research note today.

Euro Rebound

The euro is ``beginning to turn'' higher against the dollar after sustaining $1.56, the bottom of an upward trend that started a year ago, wrote Tom Fitzpatrick and Shyam Devani, Citigroup Inc. analysts who use charts to predict a currency's future movements, in a research note to clients yesterday.

``We continue to believe that the uptrend is still in place,'' the analysts wrote. ``A rally back up to the highs and beyond is expected.''

The yen was little changed after government reports showed Japan's unemployment rate rose to the highest in almost two years in June and household spending fell, adding to signs that the economy's longest postwar expansion may be coming to an end.

Japan's ``economic developments are still moving at a glacial pace leaving the yen a function of external factors such as oil prices, risk aversion and global growth,'' Ashley Davies, a currency strategist in Singapore at UBS AG, the world's second-largest currency trader, wrote today in a note to clients. ``We continue to target the dollar-yen at 105 over 1 and 3 months.''

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net;