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Tuesday July 15, 2008 - 00:20:34 GMT
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FOREX NEWS-Dollar up vs euro on Fannie, Freddie rescue plan

Mon Jul 14, 2008 4:10pm EDT

* Freddie Mac, Fannie Mae rescue lifts dollar vs euro

* Concerns about health of U.S. financial sector remain

* Market eyes upcoming Bernanke testimony to Congress (Recasts, updates prices, adds quotes, byline)

By Steven C. Johnson

NEW YORK, July 14 (Reuters) - The dollar rose from a near record low against the euro on Monday after the United States announced an emergency plan to restore confidence in mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

The U.S. Treasury boosted its direct credit lines to the two shareholder-owned but government-sponsored enterprises and said it would buy their shares if asked, while the Federal Reserve made available its direct lending window to financial firms. For details, see [ID:nN13387357].

The plan helped calm market concerns about the health of the U.S. financial and housing sectors, since the two companies fund half of all U.S. mortgages.

By late afternoon, though, the dollar had pared some of its gains, with the euro rising back above $1.59, a cent or so from its lifetime high.

"When Treasury came out with the plan and the Fed backed it up, people were reassured and took the dollar higher," said Mark Frey, head currency trader at Custom House, a global payments dealer in Victoria, British Columbia.

"But on most trading desks, I think they've realized that all we have here is a transfer of risk from the two enterprises to the Treasury," he added. "That means a much larger deficit, and it will likely lead to more dollar weakness."

Late in New York, the euro was down 0.2 percent at $1.5911 <EUR=> after slipping to $1.5842. The dollar fell 0.1 percent to 106.10 yen <JPY=>, well off Monday's high of 106.81, while sterling rose 0.2 percent to $1.9940 <GBP=>.

Billionaire investor George Soros told Reuters on Monday that government debt accumulation coupled with a U.S. recession leaves the dollar vulnerable. [ID:nN14313468].

Underlining these tensions, federal regulators seized mortgage lender IndyMac Bancorp (IMB.N: Quote, Profile, Research, Stock Buzz) on Friday, one of the largest banks to fail in U.S. history.

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 Mae and Freddie Mac.

Russia's central bank said over the weekend it was happy with its holdings of roughly $100 billion of agency bonds, which includes Fannie Mae and Freddie Mac, but other central banks were silent. [ID:nL12524115].

As of mid-2007, China and Japan were the biggest long-term investors in agency bonds at $376 billion and around $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 when he testifies before the Senate Banking Committee on Tuesday.

Money markets have scaled back their expectations for monetary policy tightening from the Fed and now don't expect it to start hiking until the final months of the year.

"It seems self-evident that this is not a financial environment that supports tighter Fed policy," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

"The one rate hike priced in for the end of January still looks like one hike too many, and I can only see the Fed hiking if inflation expectations hold a gun to its head, which is a stagflation story that is hardly good news for the dollar."

That's not to say any of the other major currencies are obvious buys, either, especially at current levels, said Custom House's Frey.

"As a currency trader, I don't necessary want to go long anything right now, other than commodities," he said. "I feel safer doing that than buying the Australian dollar at a 26-year high or the euro at $1.59, near an all-time high.

"We're getting to some pretty heady levels here, and there's good reason to be concerned about the economies of these other countries." (Additional reporting by Nick Olivari; Editing by James Dalgleish)

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