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Tuesday October 14, 2008 - 21:39:52 GMT
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FOREX NEWS-Dollar falls as interbank rates ease on rescue effort

Tue Oct 14, 2008 4:18pm EDT

* US dollar slips as global rescue plans lift sentiment

* Three-month Libor dollar rates decline

* US to pump $250 billion into banks, including 9 largest

(Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Oct 14 (Reuters) - The U.S. dollar fell for a second straight session on Tuesday as short-term interest rates for dollars eased following aggressive steps by global authorities to pump cash into troubled banks to resolve the credit crisis.

The interbank cost of borrowing dollars for three-month had its biggest fall since March on Tuesday, in response to the United States's announcement that it would inject $250 billion into banks, including the country's nine largest.

The move followed similar initiatives in Britain, France and Germany. Three-month libor dollar rates <USD3MDFSR=> fixed at 4.63500 percent versus 4.75250 percent on Monday, according to the British Bankers Association.

As a result there was some improvement in risk appetite, causing investors to unwind some safe-haven trades in both the dollar and the Japanese yen, analysts said, noting that the correction in the U.S. currency was not surprising given a recent rally.

"There is a renewed sense of optimism in the market about the efforts to rescue the financial system," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

"An improvement in risk sentiment is weighing on the dollar and the yen which have been benefiting from the dollar funding shortage in recent days. A lot of currencies were oversold against the dollar and yen on short-term basis."

The euro climbed to a one-week high of $1.3769 <EUR=>. In late New York trade, it was quoted at $1.3645, up 0.4 percent. The euro was on track for its biggest two-day gain versus the dollar in three-weeks, according to Reuters data.

Against the yen, the euro rose 0.3 percent to 139.02 <EURJPY=>, below 141.72, its high on the day. Last week, it hit a three-year low at 132.25, according to Reuters data.

The U.S. dollar fell 0.1 percent to 101.89 yen <JPY=>, surrending earlier gains that had lifted it as high as 103.06 yen, as stocks on Wall Street dropped on worries about the slowing global growth on company profits.

The greenback rallied broadly last week as stock markets swooned and investors pulled out of risky trades for the relative safety of the dollar, a trend that has been interrupted so far this week.

Against a basket of six currencies, the dollar slipped 0.1 percent to 81.425 .DXY.


But analysts said this move was likely to be temporary, with interbank lending rates not expected to fall quickly even after measures by global governments to flood banks with cash.

"We are seeing some unwinding of the safe-haven flows into the U.S. dollar. The backdrop is still challenging to say that it's going to be positive for the euro and bearish for the dollar until through mid-2009," said David Watt, a senior currency strategist at RBC Capital Markets in Toronto.

"The factors that pushed the dollar higher last week, the structural shortfall in U.S. dollar funding markets still exist. We know going forward that eventhough the U.S. economy is going into recession, the euro zone is also going into recession."

Watt said they expected the European Central Bank to cut interest rates through 2009 to about 2.5 percent and the Federal Reserve to ease by another 50 basis points to 1 percent, which should narrow the euro's yield appeal.

Analysts reckon that once the dust settles over the credit turmoil, attention will revert back to the economic outlook for both the U.S. and euro zone economies.

"We think the dollar is going to outperform most of the currencies next year as the U.S. is going to be the first out of the blocks in terms of an economic rebound," said Wells Fargo's Serebriakov.

Data on Tuesday from Germany's ZEW research institute showed a bigger-than-expected slide in investor sentiment in October, suggesting the euro zone's top economy may be in for a prolonged slump. ID:nBAE001424

The decline in U.S. stocks, however, saw the dollar trim losses against the high-yielding Australian <AUD=>, New Zealand <NZD=> dollars and British pound <GBP=>.

(Additional reporting by Steven C Johnson;)

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