Dollar Trades Near One-Week Low Versus Euro Before Housing Data

By Kim-Mai Cutler and 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 interest rates, diminishing the allure of dollar- denominated assets. The greenback snapped a five-day gain versus the Canadian dollar after the International Monetary Fund said yesterday there's no end in sight to the U.S. housing recession.

``We've had several false dawns, but the worst from the U.S. financial sector is not yet over,'' said Michael Metcalfe, the head of macro strategy at State Street Global Markets in London. ``News of more write-downs will put the dollar on the defensive.''

The dollar traded at $1.5748 per euro at 8:49 a.m. in London, from $1.5741 yesterday in New York and near a July 23 low of $1.5798. The U.S. currency was at 107.57 yen, from 107.46. The euro traded at 169.40 yen, from 169.17 yesterday.

The dollar may fall to 102 against the yen by the end of the third quarter, Metcalfe said.

China's yuan strengthened by the most in two weeks after central bank Governor Zhou Xiaochuan underscored policy ``continuity,'' spurring speculation that China will let the currency rise further to stem inflation. It climbed 0.03 percent to 6.8322 per dollar.

Prolonged Slowdown

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.

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

U.S. stocks and the dollar fell yesterday even after U.S. Treasury Secretary Henry Paulson called for banks to use covered bonds more extensively to finance mortgages. Such bonds require lenders to make good on payments in the event that homeowners default. The U.S. mortgage market currently depends on Fannie Mae and Freddie Mac and other government-linked institutions for more than 70 percent of funds.

``It's as if the dollar is on cracking, thin ice,'' Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., 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, he said.

Jobs Report

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.

Futures on the Chicago Board of Trade showed 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.

The yield gap between two-year Treasury notes and similar- maturity German bunds widened to 1.74 percentage points, from 1.71 percentage points on July 25, making the U.S. securities less attractive to investors.

Federal Reserve 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.

Consumer Confidence

Gains in the euro may be limited as a gauge of French consumer sentiment dropped to minus 48 in July, the lowest level since the index was introduced in 1987, from minus 46 in June, according to the national statistics office, Insee, in Paris.

The currency may fall for second day against the yen on speculation slowing economic growth will spur the European Central Bank to refrain from raising interest rates, eroding the returns of the region's higher-yielding securities.

``The euro zone economy's outlook has really become more bleak,'' said Jan Lambregts, the head of Asian research at Rabobank International in Hong Kong. ``Ultimately, that means the upside for the euro-dollar is becoming more capped at the moment.''

Rabobank forecasts the euro will decline to $1.55 by year- end, Lambregts said.

Traders reduced bets the ECB will raise its 4.25 percent benchmark interest rate this year. The implied yield on the December Euribor futures contract dropped to 5.08 percent, from 5.13 percent on July 25.

`Glacial Pace'

Gains in the yen may be limited after government reports showed Japan's unemployment rate rose to the highest level in almost two years in June and household spending fell, adding to signs the economy's longest postwar expansion may be ending.

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 one and three months.''

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net