Saturday July 12, 2008 - 11:28:30 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar falls as credit woes cut Fed rate hike chances
* Dollar falls as credit fears further darken market mood
* Euro rises to 2-1/2-month high vs dollar
* U.S. lawmaker raises hopes on discount window option
(Recasts, updates prices, changes byline)
By Lucia Mutikani
NEW YORK, July 11 (Reuters) - The dollar fell broadly on
Friday as persistent worries about the stability of two U.S.
mortgage finance giants were seen constraining the Federal
Reserve's ability to raise interest rates this year.
The greenback briefly got some support versus the yen,
however, after a source told Reuters Fed Chairman Ben Bernanke
had said embattled mortgage finance houses Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz)
and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) would qualify for discount window
But a Fed spokeswoman later said the U.S. central bank had
had no discussions with the two government-sponsored firms
about access to that emergency lending facility.
Separately, a senior U.S. lawmaker said the Fed and the
Treasury Department were considering opening the discount
"Ongoing concerns about the fragility of Fannie Mae and
Freddie Mac have again underscored the likely inability of the
Federal Reserve to raise rates any time soon," said Shankar
Samarjit, global FX strategist at Bank of New York Mellon in
The <EUR=> vaulted to $1.5946, the highest since April 23,
according to Reuters data. It last traded at $1.5932, up 0.9
percent on the day. The dollar dropped as low as 105.67 <JPY=>,
but later pushed back to around 106.21 yen, down 0.8 percent.
INTEREST RATES MAY GO DOWN
"The credit turmoil is a reflection of how bad things are
and there is a risk that interest rates will go down and not
up," said Benedikt Germanier, chief currency strategist at UBS
in Stamford, Connecticut.
"When we look at the OIS (the overnight index swap) market,
which is a good predictor of rate expectations, for December
it's pricing in one hike by the Fed. That is down from three
hikes back on June 17. That's helping the dollar to decline
The dollar's depreciation has been largely driven by
interest rate expectations and differentials between the United
States and the euro zone.
The New York Board of Trade's dollar index, which measures
the dollar's performance against a basket of six currencies,
dropped to a 2-1/2-month low at 71.795 .DXY, posting its
largest daily fall in more than a month.
Analysts said that while the market had been disappointed
after Treasury Secretary Henry Paulson did not hint at a
bailout of Fannie Mae and Freddie Mac, a takeover would prove
dollar-negative if this led to a transfer of debt to the
"When you have GSEs being nationalized, that would mean
that the bad credit the GSEs have would then be translated into
U.S. Treasuries, which would be a risk to sovereign issue.
There is no other reason why euro/dollar jumped," said
Germanier of UBS.
"At the same time you saw sovereign credit tightening. That
is why the dollar traded lower in sync with the Treasury
market, which also traded softer despite the fall in
Paulson said on Friday his aim at present is to back
Fannie Mae and Freddie Mac in their "current form".
A surge in oil prices CLc1 to record highs and global as
well as U.S. stock market losses also did not help the dollar.
High energy prices hurt the dollar because the United States is
a heavy oil consumer.
U.S. crude oil futures rose sharply, ending at a settlement
price above $145 a barrel after jumping to a record above $147
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by
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