Monday July 14, 2008 - 11:48:15 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar wins respite on U.S. rescue plan
* Euro down half a percent at $1.5857 <EUR=>
* Freddie Mac, Fannie Mae rescue measures boost sentiment
* Concerns about health of U.S. financial sector remain
* Bernanke testimony eyed
(Changes byline, adds quotes, updates prices)
By Veronica Brown
LONDON, July 14 (Reuters) - The dollar rowed back from a
near-record low against the euro on Monday after the United
States unveiled an emergency plan to restore investor confidence
in embattled mortgage lenders Fannie Mae and Freddie Mac.
The Treasury boosted its direct credit lines to the
government-sponsored enterprises (GSE) and said it would buy
their shares if necessary, while the Federal Reserve made its
direct lending window to financial firms available to them.
The plan went some way to calming market concerns about the
health of the U.S. financial and housing sectors, as the two
companies fund half of all U.S. mortgages. But analysts urged
caution, noting its potential expense.
"This (plan) has opened up a whole new element of
uncertainty. Now you are in a much graver situation in terms of
the cost of what the U.S. government has been forced into
doing," BTM-UFJ currency economist Derek Halpenny said.
"There are significant risks and significant uncertainties
that could have very, very negative implications for the U.S.
dollar," he added.
Underlining the tensions in the sector, federal regulators
seized mortgage lender IndyMac Bancorp on Friday in the third
largest bank failure in the country's history.
By 1115 GMT, the euro was down half a percent on the day at
$1.5857, having earlier come within half a cent of April's
record highs of $1.6018 <EUR=>.
The dollar index .DXY, which tracks its progress against a
basket of six major currencies, added 0.6 percent to 72.210,
bouncing off a 2-1/2 month low set before the U.S. announcement.
The greenback was also up 0.4 percent at 106.67 yen <JPY=>.
Analysts said the dollar's recovery would depend on whether
the U.S. initiatives were enough to calm investors' concerns
about the financial health of Fannie and Freddie. Any
improvement in their credit spreads and shares may help the
dollar rebound further.
Russia's central bank said over the weekend it was happy
with its holdings of roughly $100 billion of agency bonds, but
other central banks stayed mum. [ID:nL12524115]
As of mid-2007, China and Japan were the biggest long-term
agency bondholders at $376 billion and $228 billion
respectively, according to U.S. Treasury data.
Investors will also be watching to see how the latest
developments affect Fed Chairman Ben Bernanke's views on
monetary policy and the economic outlook.
Bernanke will testify before the Senate Banking Committee on
Tuesday and the House of Representatives' Committee on Financial
Services on Wednesday.
"The (GSE rescue plan) news does nothing to calm fears on
the extent of the unfolding economic slowdown and will raise
speculation Bernanke will be unable to toe the hawkish line he
might have wished to in this week's key semi-annual testimony,"
said Commerzbank Corporates & Markets.
Money markets have scaled back their expectations for
monetary tightening from the Federal Reserve and now don't
expect it to start hiking until the autumn.
That is potentially bearish for the dollar given the
European Central Bank's rate rise to 4.25 percent this month.
(Additonal reporting by Toni Vorobyova in London; Reporting
by Veronica Brown; Editing by Ruth Pitchford)
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