Dollar rallies against yen despite housing gloom

TOKYO (AFP) - The dollar rallied from three-month lows against the yen and gained on the euro in Asian trade Friday despite growing gloom over the US housing market, dealers said.

They said the dollar clawed back after falling heavily against the yen, which was lifted briefly by an unwinding of the so-called carry trade by speculators who have borrowed cheaply in Japan to invest overseas.

The dollar was at 119.08 yen in Tokyo morning trade, up sharply from an early low of 118.02 and from 118.68 yen in New York late Thursday.

The euro fell to 1.3704 dollars from 1.3743 dollars while rising to 163.59 yen after 163.13.

Negative sentiment towards the dollar continued in early Tokyo trade but the sharp falls attracted buyers, said Nobuaki Tani, a manager in forex sales at Resona Bank.

"There are deepening concerns over the US credit problems," he said, but added that demand for dollars from importers was likely to keep the currency in a range around 118 yen in the near future.

The gloom over the US housing sector deepened Thursday after official data showed sales of new homes dropped 6.6 percent in June.

US shares suffered one of the worst selloffs this year Thursday, with the Dow Jones ending down 2.26 percent. Japan's Nikkei-225 index lost 2.3 percent by lunch Friday.

"Significant carry trade unwinding was triggered by a slide in US and global equities overnight," said NAB Capital strategist John Kyriakopoulos.

"We suspect that carry trading unwinding has further to run while credit spreads are still widening and recent economic news has generally been weaker-than-expected across the world," he wrote in a note to clients.

The yen wobbled ahead of Japan's weekend elections amid speculation that political and economic uncertainty could deter the central bank from raising interest rates next month, dealers said.

"The dollar attracted some buying ahead of the elections amid news reports that the ruling coalition is on course to a defeat," Resona Bank's Tani said.

Some analysts still believe an August rate hike is likely however, despite a fifth straight monthly fall in Japan's core consumer prices in June.

The dollar firmed against the euro as market players adjusted their positions after a recent record-setting run for the single currency, which has benefited from expectations of rising eurozone interest rates.

The market was waiting for a report on US second-quarter economic growth, which NAB's Kyriakopoulos said would have to meet expectations for a 3.2 annualised expansion to have any impact on deteriorating sentiment.