Housing Data : Dollar Falls

Dollar Falls Versus Euro as Housing Starts Reach 17-Year Low

June 17 (Bloomberg) -- The dollar fell against the euro after a government report showed housing starts dropped in May to a 17-year low, raising speculation the Federal Reserve will delay increasing borrowing costs this year.

The pound weakened versus the euro and the dollar after Bank of England Governor Mervyn King said the path to bringing inflation within the central bank's target is ``uncertain.'' South Korea's won rose the most against the dollar in almost three months after the government said it will use a stronger currency to help slow inflation.

``The reduced expectations for the Fed rate hike certainly will come back to bite the dollar,'' said Todd Elmer, currency strategist at Citigroup Global Markets Inc. in New York. ``The economy won't recover dramatically anytime soon.''

The dollar decreased 0.1 percent to $1.5499 per euro at 9:32 a.m. in New York, from $1.5477 yesterday. The U.S. currency traded at 108.18 yen, compared with 108.22. The yen fell 0.1 percent to 167.65 per euro, from 167.49.

South Korea's won was the biggest gainer versus the U.S. currency, climbing 1.5 percent to 1,023.30 Policy makers will take ``solid'' measures, including favoring a stronger currency, to cool inflation, said Choi Jong Ku, head of the finance ministry's international finance bureau.

Sterling dropped 0.7 percent to $1.9494 and 0.8 percent to 79.46 pence per euro as King predicted will British inflation will exceed 4 percent this year. The rate accelerated to 3.3 percent in May, the highest since at least 1997, the Office for National Statistics said in a report.

Housing Starts

U.S. housing starts dropped to an annual rate of 975,000 in May, from a revised 1.008 million the previous month, the Commerce Department said today in Washington. The median forecast of 72 economists surveyed by Bloomberg News was for a decrease to 980,000 from a previously reported 1.032 million.

Industrial production in the U.S. unexpectedly fell in May. Production in factories, mines and utilities declined 0.2 percent last month after dropping 0.7 percent in April, the Fed reported today in Washington. Economists had forecast industrial production would rise 0.1 percent, according to the median of 68 estimates in a Bloomberg News survey.

The dollar weakened against the euro earlier after the Wall Street Journal and the Financial Times reported the U.S. central bank would probably leave borrowing costs unchanged beyond its June policy meeting.

Futures on the Chicago Board of Trade showed a 54 percent chance the Fed will increase the 2 percent target rate for overnight lending between banks by at least a quarter-percentage point at its August meeting, compared with 69 percent odds yesterday. There's a 16 percent chance policy makers will lift the rate to 3 percent by December.

German Confidence

The euro pared gains against the dollar after a report showed investor confidence in Germany fell to a more than 15- year low this month. The Mannheim-based ZEW Center for European Economic Research said its index of investor and analyst expectations fell to minus 52.4, from minus 41.4 in May. A negative reading means pessimists outnumber optimists.

European Central Bank President Jean-Claude Trichet said on June 5 policy makers may raise the 4 percent main refinancing rate next month to curb the fastest inflation in 16 years.

``The ZEW report could encourage euro selling,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's second- largest lender. ``Signs of a weakening economy mean the ECB could reverse course and switch to a monetary easing bias later this year.'' The euro may fall to $1.5430 today, he said.

Producer Prices

Prices paid to U.S. producers rose more than forecast in May as higher fuel and food costs heightened the threat of inflation. The 1.4 percent jump was the biggest gain since November and followed a 0.2 percent increase in April, the Labor Department said today in Washington. So-called core producer prices that exclude fuel and food increased 0.2 percent, matching economists' projections.

The Fed needs to prevent the public's expectation that inflation will accelerate from spurring demands for higher wages, William Poole, former St. Louis Fed President, said today in an interview on Bloomberg Television.

``You want to keep wages behaving,'' he said. Once the public's anticipation of rising prices begins to stoke demands for higher wages, ``the jig is up'' and inflation becomes harder to eradicate.

The public's outlook for annual inflation over five years stood at 3.4 percent in June, up from 2.9 percent the same month last year, according to the Reuters/University of Michigan Survey.

Poole also spoke out against Fed intervention with the value of the dollar. ``The Fed does not have the power to put a floor under the dollar,'' he said. ``I think the Fed should stay clear.''