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Dollar Gains on Surprise Increase in Home Sales

Reuters
Friday, 23 Mar 2007 | 10:37 AM ET

The dollar rose slightly and trimmed losses against the yen after an unexpected jump in U.S. existing home sales led some investors to believe the Federal Reserve would keep interest rates steady for a while.

The pace of existing home sales rose 3.9% in February to a 6.69 million-unit annual rate, beating economists' consensus forecast for a 6.33 million-unit rate. It was the biggest rise since a matching increase in March 2004.

"An upside surprise," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.

"It's got to be a dollar-positive at least for the near term. FX traders are going to key off Treasury yields, which are initially moving higher on this. The 4.60 (percent) mark will be a key mark for the bond market."

The euro was down versus the dollar, slipping from $1.3325 before the release of the data. The dollar edged up against the yen after the home sales report, but still down on the day. The dollar was trading at 117.55 yen ahead of the data's release.

Following the data's release, U.S. short-term interest rate futures slipped, trimming the implied chance of a Fed rate cut by the end of June. The prospects of the Fed cutting interest rates fell to 30% from 32% on Thursday and 36% just before the report.

Analysts said further consideration of the Fed's policy statement on Wednesday, where it dropped a reference to further rate rises, did not necessarily mean an imminent cut in borrowing costs was on the cards.

Instead they argued that the statement simply gave the U.S. central bank more room for maneuver.

"The statement left the Fed open in either direction ... they have still got the sentence that inflation is a concern but by taking out the reference that additional tightening may be needed they now have more flexibility," Marcus Hettinger, Global FX Strategist at Credit Suisse in Zurich, said.

"In our view the statement is neutral and for the coming months rates are clearly on hold and still data dependent," he said.

Further insight could come later in the day with speeches from a string of Fed officials including Federal Reserve Bank of New York President Timothy Geithner.

In Europe, European Central Bank executive board member Juergen Stark speaks, while ECB Vice-President Lucas Papademos addresses a conference.

Sterling was down versus the yen having hit a three-week high earlier.

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