FOREX-Dollar falls as U.S. housing data dents Fed taper view
* U.S. new home sales fall sharply, hurt dollar
* Gap between 2-year US/Japan bond yield at 1-1/2-year high
* Euro hits 1-month high vs yen, Nowotny's comments help
NEW YORK, Aug 23 (Reuters) - The dollar fell against a basket of currencies on Friday, falling from a three-week peak against the yen, as a steep drop in U.S. new home sales raised doubts that the Federal Reserve will actually reduce its asset-buying program next month. An already buoyant euro hit $1.34 following the earlier release of U.S. housing data, with investors also selling the greenback against other currencies such as the Swiss franc and Australian dollar. The dollar also slipped 0.2 percent against a basket of six major currencies to 81.325. New U.S. home sales slid 13.4 percent in July to their lowest in nine months, hurt by the rise in U.S. mortgage rates. The data depicted an economy that may not be as robust as many seem to think, which could persuade the Fed to delay winding down its stimulus program. "This report makes it look more likely that tapering will come later rather than sooner, perhaps under the leadership of a new Fed chair," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York. He added that the Fed's so-called quantitative easing should be scaled back when the U.S. economy is on a more solid footing. "Too often there is a push to end QE on the release of a good number. One good number does not make a trend and as we can see from this morning's new home sales report, the wealth effect ... is still wanting on the housing front," Borthwick added. The greenback has been well-supported the last few weeks on expectations of a Fed stimulus tapering in September. Minutes of the Fed's July meeting showed differences of opinion among members of the Federal Open Market Committee as to when the central bank should wind down, but the report did not change the market's prevailing view. The euro, meanwhile, rose against most currencies, helped by earlier comments from European Central Bank policymaker Ewald Nowotny, who said he did not see much reason for the ECB to cut interest rates. He spoke after surveys showed euro zone economic activity quickening. The euro last traded 0.3 percent higher against the dollar to $1.3393. On the week, the euro was up 0.5 percent and 0.7 percent firmer so far in August. The euro had set a six-month high of $1.3453 against the dollar earlier this week, supported by a recent improvement in euro zone economic data. A second reading of German gross domestic product confirmed that Europe's biggest economy grew by 0.7 percent in the second quarter, helped by domestic demand.
The recent pickup has pushed euro zone money market rates higher and if sustained is likely to challenge the effectiveness of the ECB's pledge to keep rates low until a full-fledged recovery is in place. The dollar edged lower against the yen to 98.59 yen after hitting a three-week high of 99.15 yen on the Reuters trading platform. But the dollar is still heavily favored by investors over the yen this year. The gap between two-year U.S. Treasury yields and their counterpart in Japanese government bonds moved to its widest since March 2012 and should encourage more investors in Japan to buy U.S. Treasuries, analysts said. Sebastien Galy, currency strategist at Societe Generale in New York, said "there has been a tick-by-tick correlation between dollar/yen and U.S. bond yields, which has certainly supported that pair." So far this year, the dollar has gained 13.7 percent against the yen. Galy also said the market consensus right now is for a Fed tapering in September and a reduction of about $20 billion. But he noted that SocGen expects the Fed to go slow and start with a $10 billion reduction in asset purchases. "There is no reason to be aggressive at the beginning of tapering. It makes more sense to wait it out and see the impact on the market," said Galy. Europe's common currency was also up 0.2 percent against the yen at 132.06 yen, after touching a one-month high of 132.42.