NEW YORK (CNN/Money) -
The dollar extended its losses Wednesday with investors unconvinced by the European Central Bank's attempt to talk down the single currency.
Just before 4 p.m. ET, the euro bought $1.2629, well under Monday's record highs of almost $1.29, but still up from $1.2580 late Tuesday. The dollar also slipped versus the yen, falling to ¥106.97 from ¥107.07 late in the prior session.
"Euro zone finance ministers have warned consistently about currency volatility, but current levels appear to be no major concern," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez.
Tuesday's two-cent hammering against the euro was sparked by a joint statement by euro zone finance ministers and ECB President Jean-Claude Trichet, who voiced concern about currency market volatility but failed to outline steps to curb the pace of the euro's recent rally.
Meanwhile, U.S. Treasury prices bounced Wednesday after two sessions of losses, as hopes for intervention-related demand offset further signs of strength in the U.S. housing market.
The benchmark 10-year note added 11/32 of a point in price to 101-28/32, yielding 4.01 percent, down from 4.03 late Tuesday. The 30-year bond rose 13/32 of a point to 107-1/32 with a yield of 4.90 percent, down from 4.93 late Tuesday.
The two-year note edged up 1/32 of a point to 100-14/32, yielding 1.64 percent, and the five-year note gained 6/32 of a point to 101-4/32 to yield 3.00 percent. Bond prices and yields move in opposite directions.
A renewed slide in the dollar stirred speculation that certain offshore central banks would soon be adding to their already-mountainous pile of U.S. debt. The Bank of Japan in particular has bought a massive amount of dollars this month and much of that is ending up in Treasury and agency debt.
The dollar's slide and speculation helped insulate the bond market from generally powerful U.S. economic data.
The Commerce Department said home construction in the United States accelerated to a record pace in December, jumping 1.7 percent to a seasonally adjusted annual rate of 2.09 million units, after rising a revised 3.9 percent to 2.05 million units in November. Economists, on average, expected housing starts to dip to a 1.95 million-unit pace, according to Briefing.com.
Building permits, a forward-looking indicator of housing demand, rose 3.3 percent to an annualized rate of 1.924 million units after falling 6 percent in November to a rate of 1.863 million units.
"It's an impressive number," Cary Leahey, an economist at Deutsche Bank Securities, told Reuters. "It just gives you more confidence that you'll get 4.0 percent plus (increases) in the fourth quarter and you'll hang in there through the first."
Such impressive growth would normally alarm the bond market by heralding higher inflation and official interest rates. Inflation is an enemy of bond investors as it erodes the value of their investments.
But core inflation indicators are around four-decade lows right now and show scant sign of accelerating, while the Federal Reserve has repeatedly stated that rapid growth is desirable to close the economy's output gap. That's why almost no one expects the Fed to change its commitment to an accommodative policy at next week's board meeting. That is helping to keep short-term rates anchored well below 2 percent.
Also early Wednesday, the Mortgage Bankers Association said that its purchase index rose 12.5 percent to 501.6, the highest level since the group began its weekly survey in 1990, after the 30-year mortgage rate fell to 5.55 percent, its lowest level since the week ended July 11.
Other figures out from the International Council of Shopping Centers and UBS showed chain store sales dipped 0.7 percent last week, dragging year-on-year growth down to 3.9 percent from 4.9 percent the week before.
-- from staff and wire reports
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