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Forex - Dollar ending year on backfoot ahead of US housing news

Monday, December 31, 2007

LONDON (Thomson Financial) - The dollar is ending the year on the backfoot against the euro as concerns about the outlook of the US economy continues to weigh on the US currency.

The only meaningful economic news today is the existing home sales figures for November and analysts said that could well hit the dollar hard, especially after yesterday's dire new homes sales figures for the month.

"There is little of note on the diary to hamper the euro with key US data due later in the day to keep the focus on the US and the dollar's outlook," said Matthew Foster-Smith, analyst at Thomson IFR Markets.

The Commerce Department reported yesterday that new home sales during November fell 9 pct to a 12-year low of an annualised 647,000.

If existing home sales during the month are below market expectations of an unchanged annualised reading of 4.97 mln, then the US currency may falter further going into the new year.

The parlous state of the US housing market has been one of the reasons why the Fed has cut interest rates in recent months by a full percentage point, taking the Fed funds rate to 4.25 pct.

The data flow towards the end of the week, particularly Friday's non-farm payrolls data for December, is likely to be key in setting forecasts about the outlook for US borrowing costs in the months to come.

Elsewhere, the euro is generally finishing the year on a relatively strong footing on renewed speculation that the European Central Bank may lift borrowing costs at least once more to rein in mounting inflationary pressures. Talk of another ECB rate hike to 4.25 pct has helped the single currency climb back above the 1.47 usd mark in recent days. At the same time, dire US housing news has reinforced market expectations the Fed will be cutting borrowing costs further in the months ahead.

The economic news this week out of the euro zone is expected to highlight the dilemma facing the ECB, with activity indicators slowing in response to the credit crunch and the strong euro, but inflation pressures remaining elevated.

At the weekend, ECB council member Axel Weber noted that higher inflation in the euro zone must not be used as a benchmark for future wage negotiations, something that could endanger stability in the medium term.

"As things stand, it seems that the price stability consciousness of the ECB is more likely to see euro zone interest rates go higher, than lower, over the first half of 2008," said Simon Derrick, currency strategist at Bank of New York Mellon.

Elsewhere, the pound was supported by reported buying of the currency from the Middle East, which prompted what traders are active today to push it higher once it passed through the 2.00 usd mark.

London 1139 GMT London 0910 GMT

US dollar

yen 112.09 up from 112.06

sfr 1.1247 down from 1.1265

Euro

usd 1.4712 up from 1.4706

yen 164.97 up from 164.80

sfr 1.6551 down from 1.6569

stg 0.7339 down from 0.7364

Sterling

usd 2.0049 up from 1.9968

yen 224.70 up from 223.77

sfr 2.2546 up from 2.2498

Australian dollar

usd 0.8782 down from 0.8798

stg 0.4379 down from 0.4404

yen 98.44 down from 98.59

Posted by MOHAMED SAID at 6:38 AM  

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