CURRENCIES: Sterling Stays Well Above $2 Mark

The dollar failed to recover against the British pound on Tuesday, as market participants were nonplussed by data showing declines in pending-home sales and a smaller-than-expected drop in factory orders.

Instead the market remained focused on expected rate hikes in the U.K. and the euro zone, and speculation that the U.S. could cut rates.

"The market is broad in a sell-dollar mode," said Michael Cairns, trading desk manager at FX Solutions.

The pound last traded at $2.0166 against the dollar. The sterling had reached a 26-year record high in late New York trading, touching $2.0195 at one point.

Meanwhile, the dollar was up 0.1% at 122.35 yen, and down 0.5% against the euro at $1.3613.

The U.S. housing market weakened further in May, with contract signings on sales of previously owned homes falling 3.5%, the National Association of Realtors reported.

Pending sales are down 13.3% compared with a year earlier and are down 21% from the peak year in 2005. Pending-home sales represent home sale contacts that have originated but have not yet closed.

After three straight gains, orders for U.S.- made factory goods fell 0.5% in May, the Commerce Department estimated.

Economists had been looking for a drop of about 1.2% in factory orders, according to a survey conducted by MarketWatch.

Although that report beat expectations, traders remained unconcerned about the figures.

It would be "a stretch" to say that traders were focusing on factory-goods numbers, according to Vassili Serebriakov, an economist for 4Cast, a financial market analysis company.

Housing data still is a big mover, Serebriakov added.

"The [housing] numbers were softer than expected, which just adds to U.S. dollar worries," Serebriakov said. "However, the market already is probably quite short the U.S. dollar going into the holidays, and I would not expect a significant downside from here into tomorrow's Independence Day."

Partially due to strong U.K. housing data, the Bank of England is expected to raise rates by a quarter-point to 5.75% at its Wednesday meeting, according to the consensus on Wall Street.

If the bank's statement is dovish, the currency market could see some selling, Cairns said. "The pound has held up very well since Friday [and] traders have an exceptional amount of appetite for risk in the market."

Meanwhile, the European Central Bank is expected to lay the groundwork for at least two more rate hikes at its Thursday meeting. Last week's euro-zone data, which included a 25-year low unemployment figure in France and high consumer confidence index, might contribute to the ECB's hawkish demeanor.

Bank President Jean-Claude Trichet could again use the codeword "vigilant" to suggest that there might be more rate hikes in the pipeline, Cairns said.

Meanwhile, the yen gained a bit on the dollar Tuesday, but stood still against most other major currencies, indicating that investors practicing the carry trade still felt quite comfortable. The trade refers to the borrowing of low-yielding currencies to invest in higher yielding assets.

Although the yen and dollar might look better today, dollar levels against the pound, euro and others have remained largely unchanged.

Meanwhile, because there already were European rate hike expectations built into currency prices last week, the catalyst for this week's slide in the dollar could be due to "sanguine expectations" built into U.S. dollar-denominated risk assets, along with developments on the subprime front, according to Naomi Fink, directory of foreign exchange strategy at BNP Paribas.

"I think that we're very, very far from pricing in [the subprime problems]," Fink added. "It's anyone's guess what the full extent of a potential contagion might be."

The rise in default rates and delinquencies still remains contained for now to the sector, Fink said. However, she said she is not convinced that the problems won't spill over.

The Independence Day holiday might see some significant shifts in the market, as investors take advantage of the lower volume of trades.

Fewer participants around the holidays creates higher volatility in the markets, allowing a small group of traders to push currency movements up with large sells and purchases.

(END) Dow Jones Newswires