By Yasuhiko Seki Dec. 24 (Bloomberg) -- The dollar fell against the euro, extending a downturn from the strongest level since September, on speculation the Federal Reserve won’t seek an early exit from stimulus measures. The greenback dropped for a second day against the 16- nation euro as an unexpected decline in new home sales and a report forecast to show a decline in business activity underscored the fragility of the U.S. recovery. The yen traded near its weakest in eight weeks on prospects the Bank of Japan may prolong credit easing to fight deflation. “The market has gone too fast and too far pricing in prospects for an increase in U.S. rates,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “The dollar may succumb to selling pressure as the excessive optimism about interest rates in the U.S. weakens.” The dollar traded at $1.4345 per euro at 12:41 p.m. in Tokyo from $1.4337 yesterday in New York. It rose to $1.4218 on Dec. 22, the strongest level since Sept. 4. The dollar was at 91.47 yen from 91.64 yen yesterday. The greenback traded at intraday highs of 91.87 yen in the past two days, the strongest since Oct. 27. The euro declined to 131.22 yen from 131.38 yen in New York. The dollar had rallied more than 5 percent versus the euro this month and traded within a quarter-cent of its 200-day moving average of $1.4198 before yesterday’s decline. The dollar is down 2.5 percent for 2009. Housing Decline Sales of new homes in the U.S. fell 11 percent in November to an annual pace of 355,000 from a revised 400,000, the Commerce Department reported yesterday. Economists had forecast an increase. The Institute for Supply Management-Chicago Inc. will report on Dec. 30 its barometer of U.S. business activity fell to 55.1 in December from 56.1 in the previous month, according to a Bloomberg News survey of economists. Readings above 50 signal expansion. “The big picture hasn’t changed, and the Federal Reserve has been pretty clear about its intentions to keep rates low, so we expect the dollar to come under pressure again,” said Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., the world’s largest custodian of assets. Dollar Reserves Futures trading in Chicago indicated a 48 percent chance that policy makers will increase the zero to 0.25 percent target rate for overnight lending between banks by at least a quarter- percentage point by the June meeting, down from a 52 percent likelihood a week ago. The U.S. dollar’s gains may end in the middle of 2010 as central banks shy away from adding greenbacks to their reserves and the Federal Reserve raises rates at a slower pace than investors expect, Barclays Plc said in a note to clients. “We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” said Steven Englander, chief U.S. currency strategist at Barclays in New York, in a telephone interview. “Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast and we’ll see dollar selling again.” The U.S. currency has appreciated 5.7 percent versus the euro from this year’s weakest level of $1.5144 reached on Nov. 25. Before a Dec. 4 payrolls report showed an unexpected drop in the unemployment rate, the Dollar Index had fallen 17 percent from the 2009 peak reached in March as investors bought higher- yielding assets with borrowed dollars. Durable Goods Orders Orders for goods meant to last several years increased 0.5 percent in November, after falling 0.6 percent in the previous month, according to the median estimate of 72 economists in a Bloomberg survey. The Commerce Department report is due today. “The dollar may rebound if there are positive surprises in today’s data,” said Masafumi Yamamoto, chief strategist at Barclays Bank Plc in Tokyo. “A transition to yen-carry trades from dollar-carry trades is at work.” To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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