July 21 (Bloomberg) -- The dollar declined against the euro on speculation reports on U.S. home sales and durable-goods orders will encourage the Federal Reserve to delay raising interest rates.

The currency also weakened versus the yen for the first day in four after U.S. Treasury Secretary Henry Paulson told CBS News yesterday the economy is in a ``challenging time'' and probably will have slow growth for months because of higher oil prices. The pound fell after a private industry report showed U.K. house prices dropped the most since at least 2002.

``There are still grave concerns about the slowing U.S. economy,'' said Masashi Kurabe, head of currency sales and trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Hong Kong, a unit of Japan's largest publicly traded lender by assets. ``I can't be wild with joy over the dollar yet.''

The dollar slid to $1.5867 per euro at 2:21 p.m. in Tokyo from $1.5847 in New York on July 18. The U.S. currency touched $1.6038 on July 15, the weakest since the European currency's debut in 1999. It also declined to 106.86 yen from 106.96 yen. The euro bought 169.46 yen from 169.49.

The U.S. currency may move between 106.20 yen and 107.40 yen today, Kurabe forecast.

Currency trading volume today may be about 75 percent of normal levels because of a public holiday in Japan, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender.

Weaker Pound

The pound slid for a second day as a Rightmove Plc report showed U.K. house prices fell 2 percent in July from a year earlier, the first annual drop since Britain's most-used property Web site started measuring them in 2002.

The U.K. currency depreciated to $1.9947 from $1.9989 in New York. Against the euro, it slid to 79.56 pence from 79.30 pence. Bank of England policy maker David Blanchflower said in an interview with the Guardian newspaper that the U.K. economy is entering a recession that may last more than a year and the central bank must lower interest rates to support the economy.

``Blanchflower said there may be three to four quarters of contraction, and the housing data were weak,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``We'll likely see downward pressure on the pound.''

The Australian dollar rose to an eight-month high of 104.21 yen on speculation the nation will retain its interest-rate advantage over Japan. The currency gained for a third day versus the yen after the difference in yield between two-year Australian and Japanese bonds widened to 5.85 percentage points, the most in a week.

Housing Report

Sales of previously owned homes in the U.S. declined to a 4.93 million annual pace in June, from 4.99 million in May, as the housing slump headed for a third year, according to the median estimate of economists surveyed by Bloomberg News.

The National Association of Realtors will release the report on July 24. A day later, the Commerce Department will say sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, a separate survey shows. Sales of existing and new homes are down 35 percent from their July 2005 peak.

Losses in the dollar may be limited after U.S. central bank policy maker Gary Stern said the Fed shouldn't wait for housing and financial markets to stabilize before raising rates.

``We're pretty well-positioned for the downside risks we might encounter from here,'' Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview on July 18. ``I worry a little bit more about the prospects for inflation.''

Rate Outlook

The report on durable goods, due from the Commerce Department on July 25, will show that orders excluding transportation equipment fell 0.2 percent in June, according to the Bloomberg survey.

The index of leading economic indicators fell in June for the first time in four months, economists forecast a report today will show. The Conference Board's gauge dropped 0.1 percent after increasing by the same amount in May, signaling growth is likely to slow over the next three to six months.

The Fed has lowered its target rate for overnight bank lending by 3.25 percentage points since September to 2 percent. Futures on the Chicago Board of Trade showed a 7 percent chance the central bank will increase its target rate for overnight bank loans by a quarter-percentage point at its Aug. 5 meeting, down from 12 percent odds a week earlier.

Bank of America

The dollar also weakened on speculation Bank of America Corp., the second-largest U.S. bank, will stoke concern about the scope of credit-market losses when it reports earnings today. Second-quarter per-share profit fell 59 percent, according to the median estimate of 21 analysts compiled by Bloomberg.

A year earlier, the Charlotte, North Carolina-based bank earned $5.76 billion, the best quarter in the company's history. The world's biggest banks and brokerages have disclosed $447 billion of writedowns and losses because of a credit-market slump triggered by mortgage defaults.

``With the U.S. economy slowing, banks will likely post further writedowns in the coming one or two years,'' said Sadaaki Kondou, assistant general manager of treasury at Mizuho Corporate Bank Ltd. in Taipei. ``Bad news on their losses will push the dollar down further.''

The currency may move between $1.5830 and $1.59 a euro today, Kondou forecast.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net

Last Updated: July 21, 2008 01:33 EDT