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Monday September 29, 2008 - 20:46:31 GMT
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FOREX NEWS-US dollar gains on euro, falls against yen on risk flight


Mon Sep 29, 2008 4:40pm EDT

* Euro, sterling drop as banks nationalized

* Dollar falls versus yen as U.S. stocks tumble

* U.S. lawmakers reject a $700 bln rescue package (Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Sept 29 (Reuters) - The U.S. dollar benefitted from risk aversion globally on Monday, even though the U.S. Congress failed to pass a $700 bln bank bailout package, as stock markets plunged and authorities were forced to rescue banks in several countries.

The Japanese yen rose against the greenback though as investors unwound carry trades, repaying low cost yen which had been borrowed to invest in higher yielding but riskier assets in other countries.

The U.S. House of Representatives failed to approve a plan to buy bad loans from U.S. banks, designed to revitalize lending markets, but at least five banks in Britain, Belgium, Russia, Iceland and the U.S. were rescued by authorities over the weekend, forcing mammoth injections of cash into the global banking system by central banks.

"The one good thing about the U.S. is that there are no more big banks that can collapse because most of them are gone. The ones remaining are just too big to fail," said Axel Merk, portfolio manager at Merk hard currency fund in Palo Alto, California.

At one point, the euro fell more than 2.0 percent to a 10-day low at $1.4301 <EUR=>, according to Reuters data and was last trading at $1.4444, down 1.1 percent on the day.

But the U.S. dollar dropped as low as 104.03 yen <JPY=>, dragged down by tumbling U.S. stocks, with the Dow Jones Industrial Average sinking more than 700 points at one stage, its biggest intraday-point decline ever.

In late New York trade, the dollar was down 1.6 percent at 104.21 yen. The low-yielding Japanese currency also surged against the the euro, with the European single currency dropping 2.7 percent to 150.54 yen <EURJPY=>.

"The yen is doing well, carry trades are suffering and the dollar is selling off on the negative news," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The unwinding of carry trades, which are funded by borrowing in the yen, saw the Australian dollar diving more than 5.0 percent to 83.54 yen <AUDJPY=R> and the New Zealand dollar dropping 3.7 percent to 70.11 yen <NZDJPY=R>.


Despite the rejection of the U.S. bailout plan by the House of Representatives, the U.S. dollar held its gains versus the euro, with market attention still fixed on the crisis in European banking.

Belgian, Dutch and Luxembourg governments nationalized parts of banking and insurance group Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz) and agreed to inject 11.2 billion euros into the financial group. [ID:nLT408294].

"Based on the failure we saw in Europe on the weekend, the euro could remain under pressure with the lack of a U.S. bailout," said Ron Simpson, director of currency research, Action Economics in Tampa, Florida.

Sterling dropped to a 10-day low at $1.7962 <GBP=> after the government nationalized the lending business of Bradford & Bingley (BB.L: Quote, Profile, Research, Stock Buzz). Retail branches and deposits were sold to Spanish bank Santander (SAN.MC: Quote, Profile, Research, Stock Buzz). [ID:nLT290893].

Sterling was last down 1.8 percent at $1.8117, its worst one-day loss since late 1996.

The banking contagion also spread to Iceland, with the government taking control of Glitnir, its third-biggest bank (GLB.IC: Quote, Profile, Research, Stock Buzz). The Icelandic crown plunged to a record low versus the euro at 144.85 <EURISK=>, according to Reuters data.

Analysts said the latest developments snapped attention back to the international nature of the financial crisis, compared with a recent tendency to concentrate on the United States.

On Monday, Citigroup Inc bought the banking operations of Wachovia Corp, while global central central banks redoubled their efforts to revive the paralyzed global financial system.

The action increased reciprocal swap lines with the European Central Bank and eight other central banks to $620 billion from $290 billion previously.

(Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss;)

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