LONDON, June 26: The dollar fell slightly against the euro on Tuesday, but reaction was limited to disappointing US housing market and consumer confidence data.

Analysts said foreign exchange dealers were being prudent ahead of a decision on US interest rates by the Federal Reserve on Thursday.

In late European trading, the euro rose to $1.3468, from $1.3460 late on Monday in New York.

The dollar dropped to 123.41 yen, from 123.64 yen late Monday.

Figures released on Tuesday revealed that sales of new homes in the US fell a bigger-than-expected 1.6 per cent in May to 915,000, against forecasts for a smaller fall to 925,000.

In addition, the Conference Board measure of consumer confidence slumped to 103.9 in June from 108.0, well below forecasts for a reading of 106 points.

Despite the weak data, the dollar saw little more than a brief dip.

“The data will weigh on the dollar ... but given the close proximity of the Fed FOMC (interest rate decision), the reaction is likely to be short-lived and limited,” said analyst Mitul Kotecha at investment bank Calyon.

US interest rates are expected to be left on hold at 5.25pc on Thursday, but the market is looking for clues about the likely future direction of borrowing costs.

“Unless we can confirm the outlook for US interest rates, it will be difficult to assess how big of a risk the housing sector is,” said Saburo Matsumoto, chief foreign exchange strategist at Sumitomo Trust Bank.

The National Association of Realtors had said on Monday that sales of existing US homes fell in May to their lowest level in four years, dropping 0.3 per cent to a weaker-than-expected annualised pace of 5.99 million.

While US rates are expected to remain on hold, the Bank of England was set to hike British borrowing costs by a quarter-point to 5.75 per cent in July to help cool consumer spending, analysts have said.

Forecasts of higher British rates had sent the pound above $2 dollars on Monday.

The British currency traded around this level on Tuesday.

The yen was firmer on Tuesday against major currencies after reports of Japanese Ministry of Finance officials beginning to voice concern over the currency's weakness.

Japanese Finance Minister Koji Omi was reported to have warned the markets against making “one-way” bets, in an apparent reference to the recent popularity for carry trades which have caused the recent slump in the yen.

Carry trades are when investors borrow money in countries with low interest rates, such as Japan, to invest in countries with higher borrowing costs, such as Britain, Australia or the US.

Carry trades are believed to be one of the reasons for the weakness of the Japanese currency.

Analysts expect the yen's gains to be limited, however, as long as the outlook is for Japanese interest rates -- which are currently at just 0.50 per cent -- to remain very low.

In late European trading, the euro was changing hands at $1.3468, against $1.3460 late on Monday, 166.13 yen (166.46), 0.6735 pounds (0.6736) and 1.6547 Swiss francs (1.6539).—AFP