Dollar Slides as Housing Starts Hit 17-Year Low

The dollar fell against the euro after U.S. housing starts plunged to their lowest level in more than 17 years in May, reducing the chance of an early Federal Reserve interest rate increase.

But losses were capped, with traders also trimming expectations of tighter monetary policy in the euro zone after European Central Bank Executive Board member Lorenzo Bini Smaghi said a quarter-point hike should bring inflation below the bank's 2 percent target.

U.S. producer prices rose by a larger-than-expected 1.4 percent in May, and housing starts fell in May to their lowest level in more than 17 years.

"If there was any forward-looking number, it was the ... housing starts and building permits coming in worse than expected one day after the housing index fell," said Ashraf Laidi, chief currency strategist at online foreign exchange brokerage CMC Markets in New York.

"This supports the notion that the housing, labor and manufacturing sectors are showing no signs of improvement, and this is entirely at odds with expectations of Fed rate hikes," Laidi said.

In New York, the euro was up about 0.2 percent at around $1.55, after hitting a session high of $1.5551 in overnight trade. It remained at this level around 11:30 a.m. The dollar gave up earlier gains against the yen to last trade near 108 yen.

Analysts said some market participants were also focusing on an unexpectedly large increase in the headline producer price index in May, which pointed to growing inflation pressures and backed views of a Fed rate hike by year end.

This prevented the dollar from being aggressively sold.

"The headline number confirms the underlying inflation pressures in the economy," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"This will support talks of the Fed hiking rates before year end. Should be slightly dollar supportive but only slightly so given that it is PPI," Strauss said.

Since September, the Fed has slashed its benchmark overnight rate by 3.25 percentage points to 2.00 percent in a series of moves aimed at preventing a recession in the housing sector from spreading to the broader economy.

Short-term interest rate futures, which track market expectations for Fed policy, showed a 66 percent of a quarter-point interest rate increase in August, down from 90 percent late Monday.

Earlier, Germany's ZEW index of economic sentiment for June came in sharply below forecasts, pushing down euro zone yields and implied rates.

In the UK, the annual CPI rate jumped to 3.3 percent in May from 3 percent, the highest since the Bank of England was granted independence in 1997, prompting a letter to the Treasury from BoE chief Mervyn King explaining the rise.

But King struck a rather more dovish tone than many had expected, arguing that aggressive action to cool price pressures over a 12-month horizon would spur market volatility and that inflation could even undershoot its target over two years.

That caused sterling to fall broadly. Sterling also fell against the dollar — about 2 full cents down from its intraday high — and the euro was up against sterling at about 79 pence.

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