July 25 (Bloomberg) -- The euro rose against the dollar after European Central Bank council member Klaus Liebscher said policy makers have room to raise interest rates a second time this year even as economic growth falters.

The dollar also weakened before government reports that may show U.S. durable-goods orders and new-home sales dropped in June and as crude oil rose for a second day. The yen was poised for its first weekly advance against the euro since May as a decline in stocks prompted traders to pare holdings of higher- yielding assets funded in Japan.

``A lot of people doubted that the poor economic data was going to spell the end of the tightening cycle'' in Europe, said David Woo, global head of currency strategy in London at Barclays Capital. ``The fact that the ECB is still talking tough and oil prices are starting to stabilize is psychologically supportive for the euro.''

The euro rose to $1.5733 as of 6:26 a.m. in New York, from $1.5677 yesterday. It also advanced to 168.88 yen, from 168.28, after rising to a record high of 169.96 on July 23. The dollar was little changed at 107.33 yen.

Liebscher said ECB policy makers still have scope to raise interest rates. The Frankfurt-based central bank raised its main refinancing rate to 4.25 percent on July 3, citing the need to control inflation.

``We haven't exhausted our room for maneuver,'' Liebscher, who also heads Austria's central bank, said in an interview in his office in Vienna. ``I'm not that surprised'' by the latest economic data. ``We expected a weaker second and maybe third quarter,'' he said.

Durable Goods

The dollar may stay lower as orders for U.S. durable goods, products that last several years, fell 0.3 percent in June, according to the median forecast of 78 economists surveyed by Bloomberg News. There was no change the previous month. The Commerce Department is due to release its report at 8:30 a.m. in Washington.

The department will report at 10 a.m. today that sales of new houses dropped to an annual pace of 503,000 last month, from 512,000 in May, according to a separate survey of economists.

The dollar still headed for a second weekly advance against the euro as traders added to bets the Federal Reserve will raise interest rates from 2 percent this year. Philadelphia Fed President Charles Plosser said on July 23 rates should rise ``sooner rather than later'' to quell inflation.

Rate Futures

Futures on the Chicago Board of Trade showed a 42 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by Sept. 16, up from 41 percent odds a week ago. Policy makers next meet Aug. 5.

The yen rose earlier as declines in equities eroded demand for the so-called carry trade. The MSCI World Index of stocks lost 0.6 percent, for a 0.5 percent drop this week. Financial stocks have led the rout that has erased more than $13 trillion from equities worldwide since October as accelerating inflation and $468 billion in writedowns and credit-related losses threaten to push the U.S. into a recession.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan's target lending rate is 0.5 percent, the lowest among major economies. Benchmark rates are 4.25 percent in Europe, 7.25 percent in Australia and 5 percent in the U.K.

`Selling for Yen'

``Some speculators are selling the euro and other currencies for yen,'' said Jun Kitazawa, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of Brown Brothers Harriman. ``Stock declines are a factor. This isn't a good environment for carry trades.''

The yen may strengthen to 166.50 versus the euro next week, Kitazawa forecast.

The Japanese currency also rose 1.7 percent against the New Zealand dollar this week to 80.03, its biggest gain since June 6. The Reserve Bank of New Zealand said yesterday it may reduce borrowing costs further after policy makers cut the benchmark interest rate by a quarter point to 8 percent.

The Australian dollar was the second-worst performer among the 16 most-traded currencies today after Melbourne-based National Australia Bank said it increased provisions for collateralized debt obligations by A$830 million ($795 million). The lender's shares plunged 14 percent, the most since the 1987 stock-market crash.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: July 25, 2008 06:37 EDT