* Dollar falls as housing starts plunge in May
* U.S. headline PPI surges in May, curbing dollar's fall
* Mixed data reduces chances of early Fed rate hike
(Recasts, adds comments, changes byline)
By Vivianne Rodrigues
NEW YORK, June 17 (Reuters) - The dollar fell against the
euro on Tuesday as U.S. housing starts plunged to their lowest
level in more than 17 years in May, casting more doubt over an
anticipated early Federal Reserve interest rate increase.
But losses were limited, with traders also paring
expectations of tighter monetary policy in the euro zone after
ECB Executive Board member Lorenzo Bini Smaghi said a
quarter-point hike should bring inflation below its target.
"The dollar lost a lot of steam after the housing data,"
said Samarjit Shankar, a director for Global Strategy at The
Bank of New York Mellon in Boston. "The market got ahead of
itself last week betting on a rate hike, but the truth is that
the economic data does not fully support that."
Housing starts set an annual pace of 975,000 units in May,
the lowest since March 1991. For details, see [].
Other reports showed U.S. industrial production slipped
unexpectedly in May and a surprise widening in the
first-quarter current account deficit.
The euro rose earlier to $1.5551 <EUR=> and in late
afternoon trading in New York it was last at $1.5517, up 0.3
percent on the day. Against the yen, the dollar fell 0.2
percent to 107.94 yen <JPY=>.
"The worse-than-expected U.S. housing starts and building
permits are a stark reminder for fed funds futures not to get
ahead of themselves in pricing rising chances of a rate hike
later this year," said Ashraf Laidi, chief currency strategist
at CMC Markets in New York.
Short-term interest rate futures, which track market
expectations for Fed policy, showed around a 55 percent of a
quarter-point interest rate increase in August, down from 90
percent late on Monday.
RESTORE DOLLAR APPEAL
Speculation of an early policy tightening from the U.S.
central bank ignited a dollar rally last week as this would
restore some of the greenback's allure to investors seeking
higher returns.
The Fed has slashed its benchmark overnight rate by 3.25
percentage points to 2.00 percent since mid-September in a step
aimed at preventing a recession in the housing sector from
spreading to the broader economy.
Analysts remain convinced that the Fed will raise interest
rates by year-end, citing an unexpected 1.4 percent rise in the
headline producer price index in May, which pointed to growing
inflation pressures already highlighted by the central bank.
"This will support talks of the Fed hiking rates before
year end. Should be slightly dollar supportive but only
slightly so given that it is PPI," said Matthew Strauss, senior
currency strategist at RBC Capital Markets in Toronto.
Earlier, Germany's ZEW index of economic sentiment for
June came in sharply below forecasts, pushing down euro zone
yields and implied rates.
Euro zone interest rate expectations were also trimmed
after the European Central Bank's Smaghi indicated a single
hike would be sufficient to bring back inflation below the
bank's 2 percent target.
In the UK, the annual Consumer Price Index rate jumped to
3.3 percent in May from 3 percent, the highest since the Bank
of England was granted independence in 1997, prompting a letter
to the Treasury from BoE chief Mervyn King explaining the
rise.
But King struck a rather more dovish tone than many had
expected, arguing that aggressive action to cool price
pressures over a 12-month horizon would spur market volatility
and inflation could even undershoot its target over two years.
That caused sterling to fall broadly. Sterling was down 0.3
percent against the dollar at $1.9568 <GBP=>, after falling as
low as $1.9470. The euro was up 0.6 percent against sterling at
79.27 pence <EURGBP=>.
"There seems to be a broader attempt by central bankers in
the major economies to rein back some of the expectations about
the Fed, or general interest rates rises that we've seen
starting to be priced," said Shaun Osborne, chief currency
strategist at TD Securities in Toronto.
(Additional reporting by Lucia Mutikani; Editing by Diane
Craft)
