NEW YORK (Bloomberg) — The US dollar gained versus the euro last week, rebounding from a two-year low, as signs of a recovering housing market reduced speculation the Federal Reserve will cut interest rates.The US currency touched its lowest since March 2005 after the central bank removed a reference to “additional firming” in its statement following a policy meeting this week, signalling it’s open to either lowering or raising borrowing costs. The dollar erased all its losses after an industry report showed sales of previously owned homes unexpectedly rose.

“The market is reassessing the Fed statement,” said Bill Bertha, senior currency dealer at Mellon Financial Corp. in Pittsburgh. “The dollar is getting short-term relief.”

The dollar strengthened 0.3 percent this week to $1.3283 per euro on Friday. It rose 1.2 percent to 118.12 yen.

The US currency dropped 1.5 percent last week against the euro, the most in almost four months, on concern mounting delinquencies among homeowners with poor credit histories may drag down the US economy.

The yen fell this week against all 16 major currencies tracked by Bloomberg on speculation investors were resuming investments in high-risk, high-yielding assets financed by borrowing in Japan’s currency, a practice known as the carry trade.

The Bank of Japan left its key interest rate at 0.5 percent this week, the lowest among developed countries. BOJ Governor Toshihiko Fukui said the central bank will keep interest rates at “extremely low levels” for “some time”.

The dollar lost 0.5 percent against the euro on March 21 as the Federal Reserve’s statement fuelled speculation the central bank’s next move would be to cut rates. As economists expected, the central bank kept the target rate for overnight lending between banks at 5.25 percent.

Futures contracts yesterday showed a 28 percent chance the Fed will cut its key rate by a quarter-percentage point to five percent at its June 28 meeting, down from 52 percent odds on March 21.

“The market is taking a bit more balanced view, saying, ‘OK, the Fed is certainly not ready to cut rates’,” said Michael Klawitter, a currency analyst in Frankfurt at Dresdner Kleinwort.

The National Association of Realtors yesterday unexpectedly reported sales of existing homes rose 3.9 percent in February, the fastest pace in three years, to an annual rate of 6.69 million.

The median forecast of economists surveyed by Bloomberg News was for existing home sales to drop 2.5 percent.

The yen dropped 3.2 percent against the New Zealand dollar and 2.4 percent against the Australian dollar this week.

The Swiss franc, another currency that investors use to fund carry trades, dropped 2.2 percent against the Australian currency and about three percent against the New Zealand dollar.

Australia’s benchmark rate is 6.25 percent and New Zealand’s is 7.5 percent. Switzerland’s key rate is 2.25 percent.

[box] Canada’s dollar posted its biggest weekly advance in seven months as investor speculation dimmed that the Bank of Canada will cut borrowing costs this year.

The currency climbed 1.3 percent last week after a report showed inflation in Canada accelerated last month, while the US Federal Reserve abandoned its tilt toward higher borrowing costs.

“Investors now have different rate expectations for the US and Canada,” said Benjamin Tal, a senior economist at CIBC World Markets Inc. in Toronto. “The Bank of Canada seems to be on the sidelines for the rest of the year, and that’s elevating the currency.”

Canada’s dollar rose to 86.15 US cents this week, from 85.04 US cents a week earlier, capping the best weekly performance since August. One US dollar buys C$1.1608.

The currency reached a three-month high on March 21.