Housing market stabilizing? Home prices in the U.S. fell at a slower pace in the second quarter, signaling the worst housing slump in more than 25 years may be starting to stabilize, a private survey showed today. The Commerce Department releases the data at 10 a.m. today in Washington.

Treasuries in holding pattern ahead of housing report. Treasuries were little changed this morning, with the 10-year note yield near a 3-month low, ahead of reports that may say housing prices declined the most in 7 years and consumer confidence edged higher. The yield on the 2-year Treasury gained 2 bps to 2.34% at 8:32 a.m. in New York, according to BGCantor Market Data. The 10-year note yielded 3.80% after touching 3.77%, within 1 bp of the lowest since May 13. Yields should still rise this quarter as investors bet the next interest-rate move by the Fed will be higher, according to Calyon, the investment-banking arm of Credit Agricole SA. Calyon expects the 2-year note will yield 2.65% by the end of September. Yields move inversely to bond prices. Ten-year yields have fallen almost half a percentage point since the middle of June as forecasts for slowing economic growth spurred demand for the relative safety of government debt. Bloomberg

Dollar's rally "close to unprecedented." The dollar hit a 6-month high against the euro on Tuesday after weak German data highlighted a flagging euro zone economy. The euro slid to $1.4582, the lowest level since Feb. 14, and was trading at $1.4590 by 7:07 a.m. in New York, from $1.4754 yesterday in New York.The euro has lost more than 8% versus the dollar since touching an all-time high of $1.6038 on July 15, sliding as manufacturing and service industries in the 15-nation euro region contracted for a third straight month in August. Traders have increased bets the ECB will lower interest rates this year to spur economic expansion. The dollar's rally over the past month is "close to unprecedented" in the 35 years since the currency was decoupled from gold and will have room to rise further, according to a report by Lehman Brothers Holdings Inc. in New York. "There's good reason why the dollar is rallying, particularly against the euro," Kathy Lien, director of research at GFT Forex, said in an interview with Bloomberg Television. "Once we get more speculation about the possibility of an ECB rate cut, that could push the euro-dollar a little lower." Reuters/Bloomberg

Oil falls with dollar's precipitous rise. Oil prices slumped below $113 a barrel Tuesday as gains by the U.S. dollar against other major currencies pulled investors away from commodities and outweighed concerns Hurricane Gustav may disrupt oil operations in the Gulf of Mexico. By midday in Europe, light, sweet crude for October delivery was down $2.17 to $112.94 a barrel in electronic trading on the NYMEX. While oil prices initially rose earlier in Tuesday's session due to the fears over Hurricane Gustav, they began falling markedly as the dollar strengthened. Oil prices typically fall when the dollar strengthens as investors buy commodities as a hedge against inflation and weakness in the U.S. currency. Oil has fallen sharply from a record high of $147.27 reached on July 11 in part due to evidence of a global slowdown in energy demand. It remains up about 15% so far this year. Reuters/MyWay.com

"Gears of capitalism grinding to a halt?" The U.S. finance industry is about to find out how expensive credit has become. Banks, securities firms and lenders have a record $871 billion of bonds maturing through 2009, according to JPMorgan Chase & Co., just as yields are at their most punitive compared with Treasuries. The increase in yields may cost them as much as $23 billion more in annual interest versus a year ago based on Merrill Lynch index data. Higher refinancing expenses will restrict the ability of banks to borrow in the capital markets and lend, further cutting off credit to consumers and businesses and curbing what is already the slowest growing economy since 2001. Standard & Poor's said last week that it had a "negative'' outlook on almost half of the 50 highest-rated financial institutions in the U.S. as of June 30, the highest proportion in 15 years. Interest-rate derivatives imply that banks are even becoming hesitant to lend to each other amid the flood of maturing debt. "The credit crunch is only now beginning because bank capital is so constricted by losses to date, that they will have to begin shutting off credit to households and corporations and that's when we get the defaults." They are charging each other a premium of 78 bps over what traders predict the Fed's daily effective federal funds rate will average over the next 3 months. That's up from 24 bps in January, and may widen to 85 bps by mid-December, approaching the record levels set last year, prices in the forwards market show. "The gears of capitalism are grinding to a halt," said Mirko Mikelic, senior bond fund manager at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $21 billion in assets. "There is a tremendous concern over the banking sector and a scramble right now for capital." Bloomberg