Dollar drops on housing data; worst week in year

NEW YORK (Reuters) - The dollar slid across the board on Friday as data showing a 9 percent decline in sales of new U.S. homes last month heightened concern about the economy, putting the greenback on track for its worst week in more than a year.

The housing report, which was weaker than economists had expected, also bolstered the case for more Federal Reserve interest rate cuts in 2008.

Earlier this week, the S&P/Case-Shiller index showed a record decline in home prices in October.

"Certainly, the focus in the first quarter will be how far (home) prices fall and what action the Fed takes to counter the fall," said Greg Salvaggio, senior currency strategist at Tempus Consulting in Washington, D.C. "Markets are already thin for the holidays, and on top of that, people really don't want to be holding the dollar right now."

Instability in nuclear-armed Pakistan after Thursday's assassination of opposition leader Benazir Bhutto also prompted investors to shed dollars in favor of save-haven assets such as gold, Treasuries and the Swiss franc.

Late afternoon in New York, the euro was up 0.7 percent at $1.4714, near a session peak and two-week high of $1.4727. Analysts expect it to renew a run at $1.50 in early 2008. It topped out around $1.4966 last month, according to Reuters data, an all-time high.

Lower U.S. rates would cut the dollar's yield advantage, especially with the European Central Bank showing no signs of matching the Fed with rate cuts of its own.

The dollar fell 0.9 percent to 112.63 yen, a two-week low, and plunged 1.1 percent to 1.1269 Swiss francs also a two-week trough. On the week, the dollar was 2.5 percent weaker against the franc, its biggest weekly slide in more than a month, at current prices.

Against a basket of six major currencies .DXY, the dollar was down 0.5 percent on the day and 1.9 percent this week, on its way to its worst weekly performance since April 2006 at current prices.

Bhutto's murder plunged Pakistan into the worst crisis in its 60-year history.

"Usually when risk aversion spikes, the dollar gains on the back of safe-haven flows; however, considering the U.S. relationship with Pakistan and the negative impact of increased tensions in the regions for the U.S., the market chose to punish the dollar," said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

Pakistan borders Afghanistan, where the United States has ongoing military operations, and has been regarded as a key ally in the war against al Qaeda and the Taliban.

Strategists at Brown Brothers Harriman said yen gains in particular could be tied in part to year-end redemption flows back to Japan.

Trading will remain thin in the sessions ahead, with Japanese financial markets closed from Monday to Thursday next week, reopening for a half day on January 4.

Several European centers, including Germany, will be closed on Monday, and all major markets are closed on Tuesday for New Year's Day.

"From here the dollar is likely to edge lower, but given the time of year and liquidity issues, we don't foresee any clear trend," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.

(Reporting by Nick Olivari and Steven C. Johnson; Editing by Dan Grebler)