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Dollar Tumbles After Weak U.S. New Home Sales
Reuters, March 24, 2006
NEW YORK (Reuters) - The dollar tumbled on Friday after a weaker-than-expected housing report curbed market expectations of further greenback-boosting Federal Reserve interest rate hikes.
A government report showed sales of new U.S. homes plunged in February for the biggest drop in nearly nine years.
The dollar fell, with the euro rising to $1.2035 late on Friday, up about 0.5 percent from late Thursday, but still lower than its $1.2189 level last Friday, and with the dollar trading within its recent ranges.
Some currency strategists wondered whether the dollar's negative reaction was one of the harbingers of a turning point lower for the currency, which rallied some 15 percent against the euro and yen in 2005, but which has been boxed in narrow ranges for the first quarter this year.
"You will not see any more upside impetus for the dollar," said T.J Marta, senior currency strategist with RBC Capital Markets in New York.
Marta said that since the currency market already has priced in the Fed's tightening cycle peaking with a 5 percent fed funds rate by mid-year, the dollar could weaken moderately by the year-end as the wide U.S. trade deficit and foreign central banks' reserve shifts weigh on the U.S. currency. He forecast the euro would rise moderately to $1.24 and the dollar would fall to 110 yen by the end of this year.
The dollar had started the day higher but first stumbled after a report showed weakness in non-defense capital goods orders excluding aircraft -- a key part of the durable goods report and an important measure of business investment.
Against the yen, the dollar was down 0.4 percent to 117.45 yen.
Against the Swiss franc, the dollar was down 0.5 percent at 1.3106 francs.
Sterling was up 0.5 percent at $1.7430.
Friday's release of February new home sales data followed a surprisingly robust reading of February U.S. existing home sales released on Thursday which had increased market expectations for Fed rate rises.
The Fed is widely expected to raise rates from 4.50 percent to 4.75 percent when its policy-making Federal Open Market Committee meets on Monday and Tuesday.
After next week's policy setting meeting, "this number does not increase the case for a move beyond 5 percent," said Brian Dolan, director of FX research at Gain Capital in Bedminster, New Jersey, citing the latest housing report as the cause of the dollar's sharp fall.
Financial markets are pricing in a roughly 83 percent chance that the Fed will raise rates again to 5 percent at its meeting in May, down from 92 percent. The futures market is leaning toward rate cuts by late this year or early in 2007.
Higher U.S. yields have burnished the appeal of dollar-denominated deposits to global investors. But now that the European Central Bank has started hiking interest rates and Japan is paving the way to start raising later in the year, the dollar could come under pressure in the coming months, analysts expect.
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