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Monday September 8, 2008 - 22:39:05 GMT
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FOREX NEWS-U.S. dollar rallies broadly on GSE takeover

Mon Sep 8, 2008 3:42pm EDT

* Dollar index trades at one-year highs

* Takeover seen bolstering U.S. financial system

* Yen, Swiss franc slide broadly on renewed risk appetite (Adds comments, updates prices, changes byline)

By Vivianne Rodrigues

NEW YORK, Sept 8 (Reuters) - The U.S. dollar rallied to a one-year peak against a basket of currencies on Monday, as the government's takeover of the country's two biggest mortgage finance agencies boosted confidence in the U.S. financial sector.

The bailout of the beleaguered Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz), which own or guarantee half of the United States' $12 trillion in outstanding home mortgage debt, also prompted investors to wade back into risky trades, by buying higher-yielding currencies and selling the yen.

Overall, analysts viewed the U.S. Treasury move as a positive step in staving off wider financial and housing market weakness.

"The bailout package is going to help bring money and liquidity back to the U.S. financial system," said Greg Salvaggio, a vice president for trading at Tempus Consulting in Washington, D.C. "Today's rally in the dollar is not so much the result of a bet in U.S. economic fundamentals, but instead a bet liquidity and trading volumes will get back to normal."

In late afternoon trading, the U.S. dollar index on the ICE Futures Exchange, which measures the value of the dollar against a basket of six currencies, traded at one-year highs, up 1.3 percent on the day at 79.559 .DXY, according to Reuters data.

The euro fell to as low as $1.4055 <EUR=>, the lowest in about 11 months. It last traded at $1.4104, down 1.1 percent.

The dollar initially fell in the aftermath of the weekend action as investors took the government's takeover of the stricken government-sponsored enterprises (GSEs) as an excuse to buy riskier assets, sending stock markets soaring and the low-yielding Japanese yen sharply lower.

The greenback last traded up 0.2 percent at 107.94 yen <JPY=>. The euro was also down against the yen at 152.32 <EURJPY=>.

"On balance, the takeover of Fannie and Freddie is a net positive for the U.S. dollar because it shores up confidence in the U.S. financial sector," said Omer Esiner, a senior market analyst, at Ruesch International on Washington.

"Having said that, I don't think the government action represents a silver bullet for all the problems facing the housing market and the economy. There are still so many questions about this bailout."

BUDGET IMPLICATIONS OF BAILOUT

But while the news did much to alleviate concern about systemic financial market risks, it did little to change fundamentals that had started to drive the dollar higher prior to the weekend -- slowing growth in the euro zone and the UK.

Some analysts though have expressed reservations about the latest U.S. government move and were not ruling out a correction in the dollar's bullish trend of the past month.

Analysts at Wells Fargo said the potential costs to the taxpayer could be substantial and unwelcome in an economic slowdown where the U.S. Treasury has limited scope for fiscal maneuver.

"We do believe...that the dollar's surge has gotten ahead of itself and, as significant as today's announcement is, it is not clear it will provide all the answers to the mortgage market's difficulties," Wells Fargo said in a research note.

"As initial euphoria gives way to measured sentiment, we still see potential for a sizable dollar correction in coming weeks, with the euro gaining towards the high $1.40s."

In the wake of the Fannie and Freddie takeover, U.S. Treasuries sank and U.S. and European shares rallied.

Sterling reversed earlier gains versus the dollar after UK manufacturing output prices suggested factory gate inflation might have peaked. The pound <GBP=> slid to as much as $1.7472, a fresh two-year low.

The dollar also gained 1.1 percent against the low-yielding Swiss franc to 1.1309 francs <CHF=>. (Additional reporting by Gertrude Chavez-Dreyfuss and Lucia Mutikani; Editing by Richard Satran)

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