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Dollar may rise on speculation growth will prevent Fed rate cut, gold futures fall - extended

The dollar may strengthen on speculation reports this week will show US home sales stabilized last month and orders for durable goods jumped.

The US currency may extend gains from last week, when it climbed to the highest in almost four years against the yen. Traders reduced bets the Federal Reserve will lower interest rates in coming months after reports last week showed US new home sales and consumer sentiment were stronger than forecast. „The US economy remains solid and the dollar's momentum is still firm,” said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. „I do not expect the Fed to cut rates for a few months.” The dollar traded at ¥121.35 at 1:40 p.m. in Tokyo from 121.24 in New York on January 19. It touched ¥121.60 on January 18, the strongest since March 2003.
Against the euro, it was at $1.2972 from $1.2957. The US currency may rise to ¥121.60 today and ¥122 this week, Muta said. Sales of previously owned homes, which account for about 85% of the market, held at an annual rate of 6.25 million last month compared with 6.28 million in November, the National Association of Realtors is expected to report on January 25. Purchases were at a two-year low of 6.21 million in September. Orders for durable goods rose 3.5%, the most since September, another report may show on January 26, according to the median forecast of economists surveyed by Bloomberg.

Interest-rate futures show traders see a 5.4% chance the Fed will cut its target overnight lending rate between banks in May, down from an 8.1% likelihood on January 19. Policy makers next set rates on January 31. „All it would take is those interest-rate cuts priced in the US markets to be completely removed for the dollar to have another leg up,” said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. „A 5.25% Fed funds rate is very attractive for US dollar deposits.”
The dollar may rise to ¥124 by March 31, Grace said. Any losses in the yen may be limited because hedge-fund managers and other large speculators are already betting on a drop in record numbers, said Junya Tanase, a currency strategist in Tokyo at JPMorgan Chase & Co. The difference in the number of wagers on a decline in the yen compared with those on a gain - so-called net shorts - jumped to a record 138,146 for the week ended January 16, compared with net shorts of 123,343 a week earlier, according to data from the US Commodity Futures Trading Commission released January 19.
The numbers are sometimes used as a contrary indicator. „The pace of the yen's depreciation also has been so fast,” said Tanase. „Investors should be cautious about a short-term correction of the yen.” Japan's currency may move between 119.50 and 122 per dollar this week, he said.

The euro may gain on speculation German confidence improved, suggesting rates may rise in coming months. The Ifo's sentiment index climbed to 109, the highest since records for a re-unified Germany began in 1990, according to the median of 43 estimates in a Bloomberg News survey. The Munich-based institute is scheduled to release the data on January 25.
The ECB has increased its benchmark six times since December 2005 to 3.50%. ECB member Juergen Stark is also scheduled to give a speech on January 25. He said last week „it's a fact” that rates are low. „The euro has room to go higher,” said Lu Xinyi, chief strategist of the international treasury division in Tokyo at Mizuho Corporate Bank Ltd. „Hawkish comments from the ECB support expectations for higher rates.” The euro may rise to $1.3030 this week, he said.

The yen may extend losses after the Bank of Japan left interest rates unchanged on January 18, retaining the disadvantage of yen-denominated securities compared with US Treasuries. Japan's currency today is the worst performer of 16 major currencies after holding rates at 0.25%, the lowest among major economies. „We're still facing yen-selling pressure after the BOJ skipped a rate hike last week,” said Michiyoshi Kato, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. „There will be no catalyst for buying yen for a while.”
The yen may fall to 121.60 per dollar today, Kato said. The yield advantage of US 10-year Treasuries over comparable-maturity Japanese debt widened to 3.11 percentage points on January 19, the most since September. A larger difference dims the appeal of yen-denominated assets. Traders today see a 50% chance of a rate increase at the next BOJ meeting on February 20-21, down from 54% on January 19, according to calculations by Credit Suisse Group based on contracts for the exchange of interest rates.

Gold fell in New York from a two-week high as a gain in the value of the dollar reduced the appeal of the precious metal as an alternative investment. Gold generally moves in the opposite direction of the dollar, which strengthened against the euro and the yen on speculation the US Federal Reserve won't cut interest rates anytime soon. Gold gained 23% last year as the dollar fell 7% against a basket of six major currencies. „The dollar is still a big influence on gold,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. „I don't get an urgency to be long of gold.” Gold futures for February delivery fell $2.30, or 0.4%, to $634.10 an ounce at 8:50 a.m. on the Comex division of the New York Mercantile Exchange. Prices rose 1.5% last week to $636.40, the highest closing price since January 2. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. (Bloomberg)