Dollar falls vs yen on housing data, rate outlook

Traders in the Eurodollar options pit at the Chicago Board of Trade signal orders, shortly after the Federal Reserve's decision to leave short-term interest rates untouched between zero and 0.25 percent, in Chicago December 16, 2009.

NEW YORK (Reuters) - The dollar suffered its biggest drop against the yen in nearly a month on Tuesday as weaker-than-expected U.S. housing data dented expectations the Federal Reserve could hike rates sooner rather than later.

The euro, however, fell from a three-week high versus the dollar in choppy trading. Traders said the pair's inability to break $1.4450 in the New York session prompted some investors to buy back the U.S. currency.

Pending sales of previously owned U.S. homes fell more than expected in November, data showed on Tuesday. The report offset a rise in new factory orders and cast doubt on the view the housing market has stabilized.

The weaker data backed comments by Fed Governor Elizabeth Duke on Monday that there were still strong headwinds in the housing market and the Fed needs to keep interest rates "exceptionally low" for an "extended period."

"People are having a rethink about buying the dollar purely for reasons of expecting a higher yield," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut. "The more they rationalize any rate increase from the Fed and the more they listen to the Fed speakers, the less likely that looks."

In late trading, the dollar fell 1 percent to 91.63 yen, on track for its biggest one-day percentage loss since early December. It fell to 91.26 yen, its lowest in about two weeks, according to Reuters data.

The euro was down 0.3 percent at $1.4369, having climbed to around $1.4483 earlier in the day to hit its strongest since Dec 17.

"The dollar ... is acting in a more traditional fashion and weakening on poor U.S. data," said Jacob Oubina, senior currency strategist, at Forex.com in Bedminster, New Jersey. "We think that's going to be a theme in 2010."

PRE-PAYROLL NERVES

Traders locked in gains on the dollar's rally over the past month ahead of U.S. jobs data on Friday which could dictate the currency's near term direction.

"Investors have been very short most of the major currencies except the dollar, and I think they're buying them back ahead of the key event risk," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "There's also some thought that the dollar's year-end move was too far, too fast."

Data from the Commodity Futures Trading Commission released on Monday showed an increase in long-dollar positions for a second straight week to December 29. For the fourth week running, the non-commercial position was short euros.

For the December payrolls report, the median forecast of analysts polled by Reuters is for a decline of 8,000, with estimates ranging widely from a loss of 80,000 jobs to a gain of 59,000. <ECI/US>

The ICE Futures' dollar index .DXY, which tracks the dollar's performance against six major currencies, was up 0.1 percent at 77.608.

Some economists think December marked the first month in two years that there were more jobs created than eliminated. Any sign of jobs growth raises expectations the Fed will begin to plan rate hikes -- a move that would boost the dollar.

But others cautioned that any dollar rally sparked by Friday's report is likely to be short-lived.

"Even if we do get a strong number, nobody expects the Fed to move imminently," said Interactive Brokers' Wilkinson. "I don't think the first report of job growth will inspire the Fed to shift its policy stance."

U.S. government securities dealers expect the Fed to raise rates by the end of the first quarter of 2011, with the most bullish seeing a hike in the second quarter of this year, according to a Reuters poll last month.

(Additional reporting by Gertrude Chavez-Dreyfuss and Steven C. Johnson; Editing by Chizu Nomiyama)