Dollar sinks against euro, yen

Investors respond to dour housing and consumer data in light trading ahead of new year. Dollar rises to 6 1/2 year high against British pound.

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NEW YORK ( -- The U.S. dollar fell against the euro and a basket of currencies Tuesday as weak U.S. housing data and a dim economic outlook for the start of 2009 weighed on the currency.

The contrast of aggressive monetary easing in the United States versus a more cautious European Central Bank is lending support to the euro while hurting the greenback, analysts said.

Some market participants also cited the ongoing conflict in Gaza and Israel, as supporting the Swiss franc near a five-month high.

Meanwhile, sterling continued its downtrend, hitting a 6 1/2 year low against the U.S. dollar and hovering near record lows in sight of parity against the euro on prospects of U.K. interest rates being cut further amid a deep economic downturn.

In morning trading in New York, the euro was up 1.2% on the day at $1.4148.

"The Fed continues to be extremely proactive while the ECB has been much more cautious," said Jessica Hoversen, a fixed income and currency analyst at MF Global Ltd. in Chicago. "As a result, we have the end of the year yield differentials between the two regions that favor the euro, at least for now."

U.S. interest rates are close to zero and policymakers have said they are ready to take more unconventional steps of providing liquidity to bolster the moribund economy.

In contrast, key interest rates in the euro zone stand at 2.5%, and policymakers have been unclear about how much rates will be cut further in the near future.

Hoversen added thin market conditions during the holidays and a weak outlook for key U.S. sectors, such as housing, may help push the dollar lower in the next couple of days.

Prices of U.S. single-family homes in October plunged a record 18% from a year earlier, according to the Standard & Poor's/Case-Shiller Home Prices Indices released on Tuesday.

"The numbers are certainly very bad," said Kathy Lien, director of FX research at GFT Forex in New York. "But there is one silver lining though. The pace of the decline seems to have slowed during the month."

The U.S. dollar index slipped about one percent against a basket of currencies to 80.595.

Euro nears parity

The British pound fell as low as $1.4385, its weakest since early 2002.

"The market has been focusing a lot on the weakness in the U.K. economy," said Hoversen at MF. "It seems the pound will be 'forced' to touch parity with the euro pretty soon."

Demand for the Swiss franc rose since Monday after the Israeli attacks at Gaza had triggered so-called "safe-haven" demand for the Swiss currency and gold. The dollar was last slightly lower at 1.0586 , after trading as low as 1.0367 francs on Monday, its weakest since late July.

The dollar slipped 0.2% to ¥90.36, inching lower to ¥87.13 hit earlier in the month, its weakest since mid-1995.

Data highlights on Tuesday also include a release on consumer confidence in December and a reading of factory activity by the Institute of Supply Management. To top of page

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