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Thursday July 10, 2008 - 22:25:24 GMT
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FOREX NEWS-Relentless credit jitters hurt dollar vs euro

Thu Jul 10, 2008 4:25pm EDT

(Recasts; updates prices, changes byline)

* Dollar falls versus euro on lingering credit worries

* Fannie Mae, Freddie Mac shrs fall on capitalization fear

* US policy-makers say working to restore calm

By Lucia Mutikani

NEW YORK, July 10 (Reuters) - The dollar fell against the euro on Thursday, dragged down by persistent worries over the health of U.S. financial sector, as shares and bonds of the country's two mortgage finance giants tumbled on capitalization fears.

Investors were slightly reassured by comments by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson in testimony to Congress that they were doing everything possible to restore calm to financial markets.

"There is still some uncertainty that the renewed turbulence will be reined by the measures that the Fed is promising to deliver or keep a close eye on," said Samarjit Shankar, global FX strategist at Bank of New York Mellon in Boston.

"There is a huge switch away from U.S. equities into U.S. bonds and that's the reason why the U.S. dollar is feeling a little pressured right now."

Shares in Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) plunged to their lowest levels since 1991 on Thursday, severely limiting the ability to raise the capital needed to purchase home loans and hold down mortgage rates.

The yield spread premium for the larger Fannie Mae rose to its highest since before the Fed's bailout of U.S. investment bank Bear Stearns Cos (JPM.N: Quote, Profile, Research, Stock Buzz) in March.

"The Freddie Mac and Fannie Mae story stole the limelight and just exacerbates the overall concern regarding the state and health of the U.S. fiancials," said Gareth Sylvester, senior currency strategist at HiFX, in San Francisco, California.

"That just taints the overall sector and as result the U.S. dollar is being sold off," he added.

The euro climbed to a session high of $1.5800 <EUR=> and was last trading at $1.5780, up 0.2 percent on the day. Euro/dollar remained tucked in recent trading ranges in choppy trading conditions.

DIFFICULT TO HOLD A POSITION

"It's very difficult for the market to establish and hold a position at the moment," said Shaun Osborne, chief currency strategist at TD securities in Toronto.

"The focus on the financial sector in the U.S. and the weaker data we have means that the dollar is probably going to struggle to improve significantly from here, but there is very good interest to sell euros at 1.58."

Despite the credit jitters, the dollar firmed against the Japanese yen, helped by gains on Wall Street. This was despite U.S. crude oil futures jumping $5.60 to $141.65 per barrel.

During periods of uncertainty, low yielding currencies such as the yen and the Swiss franc tend to attract a flight-to-quality bid as the low interest rates reflect the capital surplus of their respective countries.

The dollar rose 0.3 percent to 107.07 yen <JPY=> while the greenback traded steady at 1.0274 Swiss francs <CHF=>.

"There is a bit of dichotomy between what we are seeing on the back of the credit market turmoil and what we are seeing on the currency market," said Bank of New York Mellon's Shankar.

"We are seeing net selling of both the yen and the Swiss franc. That's not very consistent with risk aversion. On the flip side we are seeing strong buying in the Australian and Canadian dollars," he said.

Sterling struggled against the dollar <GBP=> and euro <EURGBP=> after the Bank of England held interest rates steady at 5.0 percent on Thursday, but analysts say rates will have to fall, making the pound less attractive.

Sterling last traded at $1.9765, down 0.3 percent on the day, while the euro rose half a percent to 79.82 pence. (Additional reporting by Gertrude Chavez-Dreyfuss; editing by Gary Crosse)

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