Dollar Little Changed Before Housing Data; Bailout Speculation

By Stanley White and Kosuke Goto

Aug. 19 (Bloomberg) -- The dollar was little changed against the euro and yen before government reports forecast to show U.S. housing starts fell last month to the lowest level in 17 years and wholesale costs rose at a slower pace.

The U.S. currency may decline for a second day on concern the government will be forced to bail out mortgage financiers Fannie Mae and Freddie Mac. The yen may weaken on speculation the Bank of Japan will keep its benchmark interest rate at the lowest among industrialized nations today. The Australian dollar declined before Reserve Bank of Australia minutes that may support expectations for lower rates.

``The dollar is on course to decline across the board,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``Questions about a U.S. government bailout of Fannie and Freddie, combined with the housing starts data, paint an unfavorable picture of the U.S. economy.''

The dollar traded at $1.4687 per euro at 9:13 a.m. in Tokyo from $1.4694 late yesterday in New York. The dollar was at 110.09 yen from 110.13. The euro bought 161.69 yen from 161.82. The dollar may fall to $1.4770 per euro and 109.70 yen today, Amikura forecast.

The Australian dollar weakened to 86.66 U.S. cents from 87.28 cents late yesterday in Asia. The RBA will release minutes from its latest rate-setting meeting at 11:30 a.m. in Sydney. Policy makers said they have room to lower borrowing costs from 7.25 percent as the economy slows at that meeting.


Dollar Index

The ICE futures market's U.S. dollar index, tracking the greenback against the currencies of six U.S. trading partners, was little changed at 77.128 after falling yesterday for the first time in 12 days, dropping almost 0.1 percent. It's up about 7 percent since mid-July.

U.S. housing starts dropped to an annual rate of 960,000 in July, the lowest in 17 years, according to the median forecast of 75 economists surveyed by Bloomberg News before the Commerce Department's report today. The Labor Department will also report that the producer price index climbed 0.6 percent in July after increasing 1.8 percent the previous month, according to economists in a separate Bloomberg survey.

Futures on the Chicago Board of Trade showed yesterday a 26 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by its Dec. 16 meeting, down from 47 percent odds a week earlier. Policy makers next meet Sept. 16.

Fannie and Freddie

The dollar may extend yesterday's decline against the yen on speculation a government bailout of mortgage-finance companies Fannie and Freddie would wipe out common stockholders. Barron's said government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie's shares have slumped 82 percent this year and Freddie's have plunged 87 percent.

The two companies, which own or guarantee 42 percent of the $12 trillion in U.S. home loans outstanding, have posted bigger- than-expected losses due to record delinquencies amid the worst housing slump since the Great Depression.

U.S. stocks declined yesterday for the first time in three days, led by Fannie and Freddie. The Standard & Poor's 500 Index decreased 1.5 percent.

BOJ Meeting

The BOJ may cut its economic assessment for the second straight month at a monetary policy meeting today, acknowledging that threats to growth outweigh decade-high inflation as its chief concern. The world's second-largest economy shrank last quarter, putting it on the brink of the first recession in six years.

Japan's central bank will keep rates at 0.5 percent today, the lowest among industrialized countries, according to all 32 economists surveyed by Bloomberg.

``There's a high chance that the BOJ will lower its economic outlook,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a note today. ``That will place even less pressure on the yen to appreciate in the middle to long term.''

RBS pushed back its forecast for a BOJ rate hike to the fourth quarter of next year from its previous prediction for an increase in the second quarter, Yamamoto said, confirming the contents of the research note. Japan's economy will contract an annualized 0.2 percent in the third quarter, versus an earlier forecast for a 0.9 percent increase, he said.

Gains in the euro may be limited by speculation that investor confidence in Germany held near a record low, discouraging the European Central Bank from raising rates.

ZEW Survey

The ZEW Center for European Economic Research's index of investor and analyst expectations was minus 62 in August, according to the median of 43 forecasts in a Bloomberg News survey. That's near last month's minus 63.9, the lowest since the survey began in 1991. ZEW releases the report at 11 a.m. in Mannheim.

``We expect a weaker ZEW figure than the market consensus,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``If that is the case, the euro will be sold further.''

Deutsche Bank predicts the ECB will lower rates in the first quarter and the euro will decline to $1.45 against the dollar by year-end, Fukaya said.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net