* U.S. dollar reverses gains as stocks fall, oil rises
* U.S. producer prices rise, housing starts tumble
* Traders continue bout of dollar profit-taking
(Updates prices, adds comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 19 (Reuters) - The U.S. dollar weakened
across the board on Tuesday, declining for a second straight
session, as investors took advantage of weakness in U.S. stocks
to further take profits on the greenback's recent steep gains.
The euro was on pace to post its best one-day gain in a
month, while the dollar index was on track for its worst daily
loss in about five weeks.
U.S. equities plunged after a brokerage forecast that
Lehman Brothers <LEH.N> will likely take further write-downs of
$4 billion in the third quarter due to losses from
mortgage-related investments. A report showing sharply higher
U.S. inflation also dragged down stocks.
U.S. crude futures rallied as well, trading more than 2
percent higher at $115.68 per barrel <CLc1>, depressing the
dollar further.
"The euro was due for a bounce anyway against the dollar
after its sharp losses," said Matt Kassel, director of foreign
exchange at ING Capital Markets in New York. "And overall
weakness in U.S. stocks is adding to dollar bearishness."
In midday trading, the euro <EUR=> rose half a percent to
$1.4772, recovering from a six-month low of $1.4631 earlier,
according to Reuters data.
Traders also cited a report by a U.S. think-tank suggesting
that the European Central Bank may have to raise interest rates
if euro zone inflation pressures do not ease. That prompted
euro buyers to reemerge along with talk of major central bank
bids for the currency at the $1.4650 level,
On the ICE Futures Exchange, the dollar index -- which
measures its value against a basket of six currencies -- fell
0.4 percent to 76.773, after earlier hitting a new high for the
year at 77.413 <.DXY>.
Against the yen, the dollar retreated 0.4 percent to 109.62
yen <JPY=>, while the euro was little changed versus the yen at
161.69 yen. Earlier, the euro hit a three-month low at 160.87
yen <EURJPY=>.
After the greenback's slide on Tuesday, traders have
started to wonder whether this latest phase of dollar strength
has run its course.
"It could be premature to suggest this is the end of the
dollar's latest rally but the focus does now seem to be
switching round to the fact the adjustment may be nearing an
end," said James Hughes, a market analyst at CMC Markets in
London.
He added that "disappointing U.S. data, such as...housing
starts, will once again start to weigh on the fortunes of the
greenback." Hughes was referring to a report on Tuesday showing
U.S. home building projects started in July fell 11 percent to
the lowest annual rate in more than 17 years, while building
permits tumbled 17.7 percent.
In the euro zone, troubling inflation signs could mean that
the ECB may have to defer cutting interest rates, some analysts
said, which should keep euro yields attractive, even though
economic growth has slowed.
Soaring U.S. inflation and softer commodities had earlier
boosted the dollar as it limited the prospect of further U.S.
interest rate cuts by the Federal Reserve, helping the currency
improve its appeal to global investors.
Data showed on Tuesday that the U.S. producer prices index
rose 1.2 percent in July, much higher than market forecasts of
a 0.6 percent increase. Core producer prices, which exclude
food and energy, jumped 0.7 percent in July. For details, see
[].
"The core reading jumping half a percent above expectations
is pretty startling. It certainly highlights the inflationary
pressures," said Brian Dolan, chief currency strategist at
Forex.com at Bedminster, New Jersey.
(Additional reporting by Wanfeng Zhou; Editing by Leslie
Adler)
