Dollar Falls Most Against Yen in Four Weeks on Housing Drop

By Ben Levisohn

Jan. 5 (Bloomberg) -- The dollar decreased the most against the yen in four weeks as an industry report showed the number of contracts to buy previously owned U.S. homes dropped in November more than economists had estimated.

The yen rose against all of its major counterparts except the South Korean won on speculation some Japanese exporters converted overseas earnings into their own currency. The dollar touched the weakest level versus the euro in almost three weeks as traders pared bets on the outlook for interest-rate increases by the Federal Reserve.

“The dollar bulls were disappointed by the sharp decline in pending home sales,” said Kathy Lien, director of currency research at the online currency trader GFT Forex in New York. “They took the dollar lower versus the yen.”

The U.S. currency fell 1 percent to 91.60 yen at 10:52 a.m. in New York, from 92.50 yesterday. It earlier dropped as much as 1.4 percent, the biggest intraday decrease since Dec. 8. The dollar traded at $1.4419 per euro, compared with $1.4413, after touching $1.4484, the weakest level since Dec. 17. The euro slid 0.9 percent to 132.10 yen, from 133.34.

An index of signed purchase agreements, or pending home resales, dropped 16 percent after a revised 3.9 percent October gain that was more than initially reported, the National Association of Realtors said today in Washington. It was the first decrease in 10 months.

Fed Rate View

Futures trading in Chicago showed a 48 percent chance the Fed will increase its target rate for overnight lending between banks by at least a quarter-percentage point by its June meeting, compared with 60 percent odds a week ago.

“We’ve seen time and time again the market overanticipate when the Fed will enter a tightening cycle,” said Camilla Sutton, a currency strategist at Bank of Nova Scotia in Toronto. “There was a big change in the expectation in Fed rate hikes, and currencies reacted accordingly.”

Fed Governor Elizabeth Duke said in a speech yesterday that inflation will likely be “subdued” and expectations for prices should remain stable because parts of America’s economy will run below capacity.

The yield on the benchmark 10-year note decreased 0.04 percentage point to 3.77 percent. The rate touched 3.91 percent on Dec. 31, the highest level since June.

The dollar may extend its decline should reports this week fail to indicate the U.S. economic recovery is gaining momentum, according to Credit Suisse Group AG.

U.S. Yields

“With U.S. yields having risen powerfully in December, it may take particularly big and positive surprises in the data to push U.S. yield spreads and the dollar stronger,” a team led by Ray Farris, global head of foreign-exchange research in London, wrote in a report today. “The dollar is more vulnerable to downside data surprises in the coming weeks.”

Employers in the U.S. quit cutting jobs last month after a reduction of 11,000 positions in November, according to the median estimate of 69 economists in a Bloomberg survey. The Labor Department’s payrolls report is due Jan. 8.

The yen got an earlier boost versus the dollar today as people familiar with the matter said Sumitomo Mitsui Financial Group Inc. will decide as early as tomorrow to raise about 800 billion yen ($8.7 billion) to increase its capital base.

“Talks of new share issues by SMFG added to the rising momentum of the yen,” said Takashi Kudo, general manager of market information service in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

Outlook for Yen

Large manufacturers expect the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released last month.

A 7.1 percent decline in the yen in December versus the dollar drove the 14-day relative strength index to close to the 30 level that typically indicates a change in direction is imminent. It was at 42.87 today.

South Korea’s won advanced 1.2 percent to 1,140.50 per dollar after trading at 1,136.20, the strongest level since September 2008.

“Korea will be on everyone’s mind when they look at Asia as an investment outlet in the New Year, with the region expected to outperform global growth,” said David Cohen, an economist at Action Economics in Singapore. “The Korean won should be one of the stronger performers.”

To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: January 5, 2010 10:57 EST