Nov. 23 (Bloomberg) -- The dollar and yen dropped against all of the other major currencies as sales of existing U.S. homes rose last month to the highest level since February 2007, encouraging demand for higher-yielding assets.

Federal Reserve Bank of St. Louis President James Bullard said yesterday the central bank should extend its purchases of mortgage-backed securities beyond March, adding to concern the market is being flooded with U.S. currency. The dollar stopped short of declining beyond $1.50 per euro, a level where orders to buy the greenback may have been clustered.

“Given the housing numbers, I think it is short-sighted to go way long euro,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Corporate Bank Ltd. in New York. “I would rather go long in other risk currencies that would have a better medium-term outlook. We saw a lot of natural selling interest at the $1.50 level. It’s a psychological level.” A long is a bet a currency will appreciate.

The dollar weakened 0.7 percent to $1.4968 per euro at 4:02 p.m. in New York, from $1.4862 on Nov. 20. It earlier slid 0.9 percent to $1.4999 in the biggest intraday decline since Nov. 9. The U.S. currency has lost 1.7 percent this month. The yen depreciated 0.8 percent to 133.19 versus the euro, from 132.09, and declined 0.1 percent to 88.99 per dollar.

South Africa’s rand was the biggest winner versus the dollar and yen among the major currencies tracked by Bloomberg as a gain in commodities and stocks encouraged carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates.

Borrowing Costs

Benchmark rates of zero to 0.25 percent in the U.S. and 0.1 percent in Japan make their currencies popular for funding such transactions. Three-month deposits in South Africa earn 7.579 percent.

The rand strengthened 1.7 percent to 11.87 yen and advanced 1.5 percent to 7.4975 per dollar as gold climbed to a record, with bullion for immediate delivery reaching $1,174 an ounce. South Africa is the world’s third-largest gold miner. New Zealand’s currency increased 1.4 percent to 65.22 yen and advanced 1.2 percent to 73.27 U.S. cents.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, decreased 0.7 percent to 75.128. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Futures contracts on the Chicago Board of Trade showed a 31 percent chance that the Fed will raise interest rates by June, down from 67 percent odds a month ago.

Fed Buying

The central bank should retain the flexibility to respond to any weakening in the economy by extending beyond March its authority to buy mortgage-backed securities and agency bonds, Bullard told reporters after a speech yesterday in New York.

The Fed said on Nov. 4 that it will purchase a total of $1.25 trillion of agency mortgage-backed securities through the first quarter of next year. It reiterated that interest rates will stay at almost zero for “an extended period.”

Confidence in the dollar isn’t under threat, and the main challenge for now is fighting the danger of asset bubbles in emerging markets, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“I don’t believe confidence in the dollar is going to disappear soon,” Strauss-Kahn said in an interview on Bloomberg Television in London today.

U.S. purchases of existing homes increased to a 6.10 million annual rate last month from 5.54 million in September, the National Association of Realtors said. The median forecast of 66 economists in a Bloomberg survey was for an increase to 5.70 million from a previously reported 5.57 million.

The Standard & Poor’s 500 Index rose for the first time in four days, gaining 1.2 percent and extending its rally in 2009 to 22 percent.

To contact the reporters on this story: Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net

Last Updated: November 23, 2009 16:07 EST