Dollar At One-Week High As Report May Show Rebound In Housing

March 26, 2007

The dollar traded at a one-week high against the euro before a U.S. report forecast to show sales of new homes in February rebounded from a three-month low.

Strength in the housing market may reduce speculation that the Federal Reserve will cut interest rates. The U.S. currency recovered from a two-year low last week after an industry report showed sales of previously owned homes unexpectedly rose. Fed Chairman Ben S. Bernanke testifies before Congress on March 28, when he may throw more light on housing and economic conditions.

“I expect a 10 percent rebound in new home sales in February, which will help the dollar bounce this week,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “Bernanke will sound upbeat on the economy. The dollar is not finished.”

The dollar traded at $1.3267 per euro at 12:10 p.m. in Tokyo compared with $1.3283 in New York on March 23. It will strengthen to $1.3200 this week, Rennie forecast. The U.S. currency was at 117.90 yen from 118.12 last week.

New home sales rose to an annual pace of 990,000, up 5.7 percent from January, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department report.

The dollar gained 0.4 percent on March 23, after the National Association of Realtors said sales of previously owned homes gained by the most in three years. Yields on 10-year Treasury notes rose 7 basis points last week to 4.61 percent.

The Fed last week held the target overnight lending rate between banks at 5.25 percent. The European Central Bank’s key rate is 3.75 percent and Japan’s is 0.5 percent.

Bond Redemptions

The yen may be bolstered against the euro by speculation Japan’s investors will bring home principal and coupon payments from Belgium, Spain and Netherland government bonds scheduled on March 28 and March 30, said Yuji Saito, a senior currency dealer at Societe Generale SA in Tokyo.

“Japanese investors will definitely repatriate some of an estimated 30 billion euros ($39.8 billion) in payments, especially given Japan’s fiscal year-end this week,” Saito said. “This would be a yen-positive and a euro-negative.”

The yen at 156.51 per euro, may advance to 155.70 and to 117.40 per dollar today, he said.

Investors sold a net 1.9 trillion yen ($16.1 billion) of overseas bonds and notes in February, the largest amount since March 2006, figures from the Ministry of Finance in Tokyo show.

BOJ Minutes

The yen also may strengthen on speculation minutes from the Bank of Japan’s meeting on Feb. 20-21 will show policy makers are confident about growth in the world’s second-largest economy.

The BOJ raised rates at that meeting by a quarter of a percent to 0.5 percent, the first increase since July. The central bank will release the minutes at 2 p.m. today in Tokyo.

Governor Toshihiko Fukui told the Budget Committee in parliament today that price trends are becoming “firm” and he wants the bank’s monetary policy to be flexible.

“The minutes are likely to show that the BOJ considers the economy to be on a solid footing,” said Takuma Kurosawa, global markets treasurer at HSBC Bank in Tokyo. “This can be a positive factor for the yen.”

Japan’s currency may rise to 116.50 per dollar and 155.50 against the euro this week, he said.

Volatility on one-week yen options against the dollar rose to 8.88 percent from 8.65 percent on March 23. High volatility may discourage carry trades where investors borrow the yen to buy higher-yielding assets, as it increases the risk of currency losses on the bets.

Norway’s Krone

Norway’s krone may become the next favorite for investors seeking the highest-yielding currencies as the central bank increases interest rates to quash inflation

“I like the Norwegian krone,” said Paul Barrett, chief foreign-exchange trader in New York at J.P. Morgan Private Bank, which has $390 billion under management. “People are hunting for yields, and the rising interest rates make it attractive.”

Norges Bank said March 15 that it may raise its benchmark deposit rate as high as 5.25 percent next year after increasing borrowing costs nine times since June 30, 2005, to 4 percent. Barrett said it may go as high as 6 percent.

The euro may fall on speculation a German report tomorrow will show business confidence declined for a third straight month in March, suggesting interest rates are less likely to rise in coming months.

The Ifo Institute’s sentiment index declined to 106.5 this month from 107 a month earlier, according to a Bloomberg News survey. The data are due tomorrow in Munich.

Europe’s Finance Ministers

Europe’s single currency may suffer an added setback on speculation finance ministers from the 13 nations that share the currency will complain about its strength at their monthly meeting held today and tomorrow in Brussels.

“A weak Ifo number makes it easy to sell the euro,” said Masashi Kurabe, currency manager at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. “We also can’t rule out the possibility that European officials will try to guide the currency lower.”

The euro may fall to $1.3200 and 154.20 yen this week, Kurabe said.

Most investors expect the ECB to raise rates to 4 percent from 3.75 percent by the end of the third quarter, interest-rate futures trading suggests. The implied rate on the three-month Euribor futures contract for September was 4.13 percent on March 23, almost unchanged from a month earlier.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB’s key rate since the single currency’s start in 1999.

 source: Bloomberg

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