Dollar Falls as Housing Gain Spurs Demand for Higher Yields

By Oliver Biggadike and Bo Nielsen
June 16 (Bloomberg) -- The dollar fell from a three-week high versus the euro as a report showed U.S. builders broke ground in May on more houses than economists forecast, boosting demand for higher-yielding assets such as stocks.
The greenback declined against major counterparts including the South African rand and Norwegian krone as leaders of Brazil,Russia, India and China considered buying each other’s bonds and swapping currencies to reduce dependence on the U.S. currency.
The euro pared its decline against the yen as an index of German
investor confidence rose this month.
“It’s this old picture that good numbers are bad for the dollar,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “We’re in a transition phase now
that perhaps will last a bit longer. There are two groups playing against each other, the dollar bears and the dollar bulls. They’ve both fired off their arguments, and the question
is how long it will last.”
The dollar declined 0.8 percent to $1.3919 at 11:07 a.m. in New York, from $1.3803 yesterday, after advancing to $1.3749, the strongest level since May 21. The euro dropped 0.6 percent to 134.14 yen from 134.99, after earlier falling 1.7 percent to
132.74, the lowest level since May 28. The yen advanced as much as 1.8 percent to 96.08 per dollar, the biggest intraday gain since May 29, before trading at 96.67.
The pound rose from a one-week low against the dollar after a report showed U.K. inflation slowed in May less than economists predicted, making it more likely the Bank of England will raise interest rates early next year.
Consumer prices rose 2.2 percent from a year earlier, compared with 2.3 percent in April, the Office for National Statistics said today in London. The median forecast in a
Bloomberg News survey of 30 economists was 2 percent.
Sterling gained 0.8 percent to $1.6443 per dollar after earlier dropping to $1.6215, the lowest level since June 9.
The yen posted its biggest intraday increase versus the dollar in two weeks after the Bank of Japan raised its view of the nation’s economy for a second month and left the target overnight lending rate at 0.1 percent.
The euro gained versus the dollar as the ZEW Center for European Economic Research in Mannheim, Germany, said its index of investor and analyst expectations, designed to predict developments six months ahead, increased this month to 44.8, the
highest level since May 2006. The median forecast of 35 economists surveyed by Bloomberg News was for a reading of 35.

‘Strong ZEW’

“There’s no denying it was a strong ZEW,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. Combined with the BRIC nations’ discussion of the dollar, “it was a pretty potent driver for a short squeeze
in euro-dollar,” he added.
The greenback dropped versus the euro on reduced demand for safety as the U.S. Commerce Department reported a 17 percent increase in housing starts to an annual rate of 532,000 last month from a revised 454,000 pace in April. The median forecast
of 71 economists surveyed by Bloomberg News was for an increase to 485,000 from a previously reported 458,000.
The Dollar Index, used by the ICE to track the greenback against six major currencies including the euro, pound and Swiss franc, fell 0.8 percent.
Europe’s shared currency may rise as high as $1.50 per dollar in the next three months before retreating to about $1.35 by the end of the year, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London.

‘Scraping Along’

“The panic situation is behind us, but the economy is still only scraping along the bottom,” he said. “The reflation trade may have one more leg up left in it before it loses
steam.”
The dollar also declined versus the euro as leaders from the BRIC nations discussed the greenback’s role as an international reserve currency at their meeting today in the Ural Mountains city of Yekaterinburg, Russia.
“If we get a change in attitude from Russia, maybe we will get some softening of the U.S. dollar in the short term, but I don’t think it’s a medium-term trend,” said Sebastien Barbe, a Hong-Kong based currency strategist at Calyon, the investment
banking unit of France’s Credit Agricole SA.
Russia’s President Dmitry Medvedev said in Yekaterinburg that the world economy can’t rely on one reserve currency.
“The strengthening of the international currency system” requires first creating regional reserve currencies and then a“supranational currency,” Medvedev told leaders of the member states of the Shanghai Cooperation Organization. “Reinforcing
the international currency system should not be done through reinforcing only the dollar,” he added.
The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.
Russia is hosting back-to-back summits of the Shanghai Cooperation Organization, which is a regional security group, and the BRIC nations.