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Dollar hit by news of central bank selling

Associated Press | December 27, 2006

The dollar fell amid news that the United Arab Emirates was diversifying its reserves, but recovered somewhat after better-than-expected data on the US housing market.

At 2200 GMT, the euro fetched 1.3116 dollars, from 1.3097 dollars late Tuesday in New York.

The dollar fell to 118.83 yen from 119.12 yen late Tuesday.

Patrick Fearon at AG Edwards said the greenback was hurt by a report that the UAE plans to convert eight percent of its foreign-exchange reserves from dollars to euros by late 2007.

While the UAE's foreign-exchange reserves are relatively small at 24.9 billion dollars, "the statement follows a report late last week that Venezuelan energy minister Rafael Ramirez expressed interest in demanding euros instead of dollars for more of Venezuela's exported petroleum," he said.

"The statements are apparently reviving fears that the dollar is losing its appeal as an international currency."

The greenback pared its losses after official data showed that sales of new US homes rose 3.4 percent in November from October, while the backlog of unsold homes fell for a fourth straight month.

The figures raised hopes that a recent slump in the US housing market could be coming to an end, and might dissuade the Federal Reserve from cutting interest rates.

Kathy Lien at Forex Capital Management said the report on new home sales was positive for the dollar but that the market will pay close attention to Thursday's report on the much bigger market of existing home sales.

"However, with mortgage applications dropping to a five-month low last week and existing home sales being more of a lagging indicator, we remain skeptical of (the dollar's) potential strength," she said.

An analyst at Capital Spreads, Simon Denham, said that major currencies had fluctuated within narrow bands since early December and this was not about to change coming up to the end of year.

"We are still in the trading range of the last week or so, and although the dollar is slightly weaker this morning, we have in reality been drifting from the peaks seen in early December, when the death of the greenback was headline material," he said.

The yen stayed under pressure on Wednesday after comments from the Bank of Japan suggested inflation was not currently high enough to warrant a hike in interest rates in the short term.

In late New York trade, the dollar stood at 1.2258 Swiss francs from 1.2231 Tuesday.

The pound was being traded at 1.9562 dollars after 1.9536 late Tuesday.

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