August 19, 2008 / 7:33 PM / 9 years ago

FOREX-Profit-taking, weak stocks drag US dollar lower

4 Min Read

* U.S. dollar falls for 2nd day as stocks fall, oil rises

* Greenback upward trend intact

* U.S. producer prices jump, housing starts tumble

(Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Aug 19 (Reuters) - The U.S. dollar fell for a second day on Tuesday, hit by a bout of profit-taking after recent sharp gains, as crude oil prices rose and stocks on Wall Street sagged on renewed worries about the financial sector.

While the greenback's drop set the euro on track for its best one-day gain in a month and put the New York Board of Trade's dollar index .DXY on course for its worst daily loss in about five weeks, analysts shrugged it off as a pause before the resumption of an upward trend.

"We are seeing a temporary respite from the U.S. dollar strength that we have witnessed," Gareth Sylvester, currency strategist, at HiFX in San Francisco in California.

"Whenever you see the size move that we have seen, it is not untoward for the the market to take a breath and have a temporary pause before the next bout of U.S. dollar strength resumes," Sylvester added.

He said slightly higher oil prices and declining stocks had given investors an excuse to take profits on the dollar.

The euro EUR= climbed to a session high of $1.4791, recovering from a six-month low of $1.4631 earlier, according to Reuters data. It was last at $1.4768, up 0.5 percent.

Traders also attributed the euro's recovery to a report by a U.S. think-tank suggesting that the European Central Bank may have to raise interest rates again if euro zone inflation pressures do not ease.

But analysts said the euro was unlikely to rise back beyond $1.50, with the market viewing any rally as a selling opportunity.

The New York Board of Trade's dollar index, which weights the dollar against a basket of six currencies, traded down 0.3 percent at 76.822, after earlier hitting a new high for the year at 77.413 .DXY.

Strengthening Trend

"We do believe that there has been a fundamental shift in the dollar. The dollar should be on a strengthening trend going forward, but you will have periods when there will be a pause in the uptrend," said Samarjit Shankar, global foreign exchange strategist at the Bank of New York Mellon in Boston.

A second day of weaker U.S. stock prices fell also undermined some confidence in the equity market's recovery of the past month and pressured the dollar.

A higher close in crude oil prices, after three days of falls, and news that U.S. wholesale prices surged in July at their fastest annual rate in 27 years added to pressure on equities.

The dollar dropped to a session low of 109.56 yen JPY=. It was last down 0.3 percent to 109.78 yen. The euro rose 0.2 percent to 162.09 yen, after earlier hitting a three-month low at 160.87 yen EURJPY=.

The dollar initially got some support from the jump in July producer inflation, as it implied the Federal Reserve will need to raise interest rates to tame inflation by year-end, but those gains evaporated on worries slower economic growth would restrain the central bank's hand.

"You have those doves there who are just cautious of a contracting economy against the batch of high inflation and (asking) how they are going to deal with that dichotomy," said HiFX's Sylvester.

The U.S. Producer Price Index climbed 1.2 percent in July after a 1.8 percent gain in June. On an annual basis, the index rose 9.8 percent, the biggest jump since June 1981.

Data on Tuesday also showed U.S. home building projects started in July fell 11 percent to the lowest annual rate in more than 17 years, while building permits tumbled 17.7 percent.

Additional reporting by Gertrude Chavez-Dreyfuss

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