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Dollar drops; investors look to US housing and Fed

Existing home sales data will be reported on Wednesday and new homes sales on Thursday. The reports come a week before a Federal Reserve meeting where the US central bank is widely expected to cut US rates at its meeting next week.

Though the housing data will not by itself prompt the Fed to cut rates, the prospect of problems in the wider economy will make the Fed act to promote economic growth.

“The Fed wants to see a strong consumer over Christmas and that will be the driver for them to cut rates,” said Mark Meadows, currency strategist at Tempus Consulting in Washington.

A rekindling of risk appetite on Tuesday put the yen under pressure as firmer equity markets prompted some investors to move back into carry trades, where they buy securities in a high-yielding currency funded by borrowing in a low-yielding currency such as the yen.

Late morning in New York, the euro was up 0.4 percent against the dollar at $1.4240 EUR, sterling was up 0.8 percent at $2.0481 GBP and the dollar was down 0.3 percent against the Swiss franc at 1.1737 CHF.

The dollar index, which measures its value against six major currencies, was down 0.5 percent at 77.621 .DXY, but up from a record low of 77.093 on Monday.

Fed fund futures show that the market is pricing in an 82 percent chance that the Fed will cut rates by a quarter percentage point to 4.50 percent at its next meeting on Oct. 31.

“We’re rangebound waiting for housing data, then the Fed next week,” said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. “Long term players will keep to the sidelines, and the short term guys aren’t going to push us into new territory.”

The dollar did manage gains against the yen, rising 0.2 percent at 114.64 JPY above Monday’s six-week low at 113.23 yen.

The euro was up about 0.6 percent at 163.22 yen EURJPY, it’s biggest one-day percentage gain in a month, while sterling GBPJPY was up more than 1 percent at 234.68 yen.

The high-yielding Australian dollar AUD was up about 0.7 percent against the greenback while the New Zealand NZD dollar gained 0.6 percent. Both currencies also rose against the yen.

The yen fell as risk appetite led to higher equity markets around the world, beginning with a recovery in the US on Monday. US stocks were bolstered on Tuesday by strong earnings which calmed fears that consumers were curbing spending.

“US equities recovered yesterday which has led to a slight return to risk appetite and carry plays,” said Geoff Kendrick, currency strategist at Westpac. “But the market is flip-flopping and the story could turn around as easily today as it did yesterday.”

Investors sold the dollar in Asia on Monday, disappointed that a statement by Group of Seven finance ministers and central bankers at the weekend made no specific mention of the dollar’s recent weakness.

But in later trading on Monday the greenback posted its largest daily gain against the euro since June 2006 as investors concluded the dollar’s fall may be overdone for now.

Analysts cautioned investors not to read too much into Monday’s strength.

“The case for dollar weakness still persists with the G7 choosing not to make any statement about a weaker dollar,” said Meadows of Tempus.

The Canadian dollar touched a 33-year high against the US dollar after Canadian retail sales data for August beat expectations.