Dollar Falls Versus Yen on Declines in U.S. Housing, Confidence

By Ye Xie and Kim-Mai Cutler

Oct. 17 (Bloomberg) -- The dollar fell against the yen as reports showed U.S. construction of single-family homes dropped to a 26-year low and consumer confidence declined, increasing concern the world's largest economy is headed for a recession.

The yen appreciated versus the euro, the Australian dollar and the Norwegian krone as a slide in U.S. stocks encouraged investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency. South Korea's won rebounded, following yesterday's biggest drop in a decade, on speculation the government will prop up confidence in financial markets.

``If you look at the state of the economy and corporate America, we are going to be in a fairly tough situation for quite some time,'' said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. ``The dollar will be under pressure mainly against the yen. The yen will be the strongest currency going forward.''

The dollar decreased 0.5 percent to 101.06 yen at 10:03 a.m. in New York, from 101.57 yesterday. The greenback will fall below 100 ``easily,'' Eliasson said. The dollar traded at $1.3471 per euro, compared with $1.3456. The euro dropped 0.4 percent to 136.13 yen from 136.73 yesterday.

South Korea's won rose 2.8 percent to 1,334 per dollar, following a 10.8 percent decline yesterday. The Bank of Korea said it will trade directly with banks in the swaps market to help boost foreign-currency liquidity.

Yen vs. Aussie

Japan's currency gained 0.2 percent to 70.03 against the Aussie today and 0.6 percent to 15.48 versus the krone on speculation investors will unwind trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia and 5.25 percent in Norway.

``The yen is still the safe-haven currency,'' said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. ``The currency market is dictated by the general tone in stocks.''

Construction of single-family homes dropped 12 percent to a 544,000 annual rate, the Commerce Department said in Washington. Starts on all residential properties, including condominiums, slid to 817,000, below the median forecast of 74 economists surveyed by Bloomberg News.

The Standard & Poor's 500 Index fell 0.1 percent on the housing data after a 4.2 percent rally yesterday.

The Reuters/University of Michigan preliminary estimate of October consumer sentiment fell to 57.5 this month from 70.3 at the end of September. The median forecast of 61 economists surveyed by Bloomberg News was for a drop to 65.

Weekly Yen

For the week, the yen fell against the euro for the first time since the period ended Sept. 19, dropping 0.7 percent. It declined 0.4 percent against the dollar after four weeks of gains. The dollar was little changed versus the euro this week.

The move in the yen was ``muted,'' compared with its 3.6 percent gain versus the dollar in a month and its 10.3 percent advance versus the euro, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

``I am not quite sure if we're getting a reversal in sentiment, but in the short term, the yen crosses move more quickly when they shoot up than when they come down,'' said Kassel.

Implied volatility in one-month dollar-yen options fell to 20.4 percent, from 29.6 percent a week earlier, indicating traders see less price fluctuation in the coming month.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

Last Updated: October 17, 2008 10:07 EDT