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Dollar Surges on Unexpected Strength in U.S. Home Sales

The dollar firmed Thursday as data showed U.S. new home sales in April rose at their fastest pace in 14 years, bolstering the view that the Federal Reserve may not have to cut interest rates this year.

The greenback surged to a one-month high against the euro and pared losses against the yen after the report, which was part of a series of data in recent weeks reflecting a recovery in U.S. economic growth.

"By and large, the numbers were positive, especially that last and certainly the most important (report) -- new home sales. That's why you've seen dollar buying," said Tim Mazanec, director of foreign exchange at Investors Bank and Trust Company in Boston.

"The Fed has only five meetings left (this year) and you know that they're not going to move in June," he said. "They may just go unchanged all year long."

The euro traded down , after touching $1.3415 on electronic trading system EBS, the lowest since April 11.

The euro has fallen more than 2 cents from a record high hit last month, although some analysts are skeptical it has much further room to decline against the dollar.

"What has started out as a consolidation of short dollar positions several weeks ago has coincided with better-than-expected U.S. data," said Michael Woolfolk, senior currency strategist, at Bank of New York.

"This has prompted players to begin testing the will of dollar bears and may very well prompt a swing-back to a dollar-neutral position believed to be about $1.32 versus the euro. But we have to get past near-term support at $1.3420 and certainly a break of the $1.34 figure is very important in the near term," he added.

The dollar's 1.19% rise in May against a basket of major currencies was the biggest monthly increase since February 2006.

Against the yen, the dollar was down , short of a three-month peak of 121.88 hit in the previous session.

The greenback has rallied over the past month as a raft of robust U.S. economic data has led the market to pare back expectations that the Fed will cut rates this year from the current 5.25%.

A report on Thursday showed that U.S. durable goods orders, a leading indicator of capital spending, rose less than expected in April, but the previous month's reading was revised up sharply.

Eurodollar futures now reflect a chance of less than 50% that the Fed will lower interest rates by the end of 2007, in contrast to earlier this year when markets factored in more than a quarter-percentage-point rate cut.

However, markets have been pricing in more interest rate rises from the Bank of England and European Central Bank, suggesting the dollar's rebound could be a fleeting one.

Earlier, the lower-than expected Ifo business index reading in Germany, still the second-highest on record, did nothing to alter expectations that the ECB will raise rates twice more this year, to 4.25%, and perhaps even again early in 2008.

"The dollar has been trading higher for nearly a month now, and we think most of the position squaring that's helped it is already done," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

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