July 28 (Bloomberg) -- The dollar may fall for a third day against the euro after an increase in U.S. new-home sales added to evidence that the economy may be shaking off the worst recession since World War II, sapping safety demand.

The greenback traded yesterday near the lowest level this year against the currencies of six major U.S. trading partners including the euro as a report showed sales of new homes rose last month by the most in eight years. The yen fell against most of its major counterparts as analysts raised their profit estimates for U.S. companies for the first time since 2007.

“There appears to be much more optimism from an investor perspective than early June,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Commodity currencies -- Aussie, Canada, Norway, Sweden -- these currencies are all beneficiaries of risk.”

The Dollar Index, which the ICE uses to track the greenback against currencies also including the yen, pound and Swedish krona, was at 78.626 at 6:31 a.m. in Tokyo, after falling yesterday as much as 0.5 percent to 78.396. The gauge dropped to 78.334 on June 2, the lowest level since Dec. 18. The euro fetched $1.4243 after gaining as much as 0.7 percent to $1.4298, the highest level since June 3.

The U.S. is likely to see “sustained depreciation” of the dollar against other currencies, Jeffrey Frankel, a Harvard University professor, wrote in a policy memo titled “How Do We Know This Is Not Another Great Depression?”

‘Long, Slow Descent’

“The long, slow descent of the dollar as the world’s reserve currency may accelerate,” wrote Frankel, who’s a member of the panel of the National Bureau of Economic Research that dates business cycles. “China has already publicly expressed worry that U.S. Treasury securities would lose value -- this may be a turning point.”

The U.S. currency pared declines yesterday as stocks fluctuated. The Standard & Poor’s 500 Index dropped as much as 0.7 percent after touching an eight-month high. The krona gained 1.3 percent to 7.3949 after rallying as much as 1.9 percent.

“Short-term moves in equities create a lot of short-term back-and-forth in the major currencies,” said Vassili Serebriakov, a strategist at Wells Fargo & Co. in New York. “The market remains jittery and subject to sharp reversals.”

Yen Drops

The yen fell to the lowest level in almost three weeks against the dollar after the Commerce Department said yesterday new-home sales in the U.S. increased 11 percent, the biggest gain in eight years. The expansion exceeded economists’ predictions for a 3 percent gain and added to evidence the deepest housing slump since the Great Depression is starting to stabilize.

“It’s only in the last few weeks that I’ve become comfortable with the idea that the housing part of the economy is starting to turn,” said James Shugg, an economist at Westpac Banking Corp. in London. He said the housing market is heading toward “cautious growth,” with the firm forecasting the U.S. economy will expand 0.5 percent next year.

The yen declined 0.6 percent to 135.37 per euro, from 134.63 on July 24. The dollar bought 95.14 yen, 0.4 percent more than its previous level of 94.79, after touching 95.38, the highest level since July 7.

German Sentiment

The euro rose earlier against the greenback as GfK AG’s index of German consumer confidence beat economists’ forecasts. The gauge for August, based on a survey of about 2,000 people, increased to 3.5, a 14-month high, from a revised 3 for July, the Nuremberg-based market-research company said in a statement yesterday. The median forecast of 12 economists surveyed by Bloomberg News was for a reading of 2.9.

The yen dropped 1.7 percent to 12.88 versus Sweden’s krona and the dollar fell 1.1 percent to 1.8750 Brazilian reais as the outlook for corporate profits encouraged carry-trade investors to buy higher-yielding assets funded by low-cost loans.

Wall Street firms raised profit forecasts on S&P 500 companies 896 times in June and lowered them 886 times, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007.

The yen and dollar also weakened on speculation that declines in currency volatility will spur carry trades. Implied volatility on options for major exchange rates fell to 13 percent yesterday, the lowest level since Sept. 26, as measured by a JPMorgan Chase & Co. index. Lower volatility indicates diminished risk of currency fluctuations that may erode profit on carry trades.

‘Back in Vogue’

“With market sentiment so positive and foreign-exchange volatility falling to levels not seen since last September, the carry trade is back in vogue,” analysts led by Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a research note yesterday.

In carry trades, investors borrow at a low rate in one country and invest in another nation with higher returns. Benchmark interest rates of 8.75 percent in Brazil and 0.25 percent in Sweden compare with 0.1 percent in Japan and as low as zero in the U.S.

Norway’s krone rose for a third day against the euro, advancing 0.7 percent to 8.8086 as crude oil touched a three- week high. The currency gained 1 percent to 6.1862 against the dollar in one of the best performances among the 16 most-traded currencies tracked by Bloomberg.

Buying kroner versus euros will return more in the next year than all 48 other foreign-exchange trades tracked by global investment banks, according to median predictions in Bloomberg analyst surveys. Norway’s currency will appreciate 9 percent by June to 8.2 per euro, from 8.8680 on July 24, the median of 19 forecasts shows.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Sapna Maheshwari in New York smaheshwar11@bloomberg.net

Last Updated: July 27, 2009 17:35 EDT