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Monday October 20, 2008 - 20:31:30 GMT
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FOREX NEWS-Dollar rallies despite rise in risk appetite

 

Mon Oct 20, 2008 4:25pm EDT

* Dollar rebounds, shrugs off improvement in risk appetite

* Fed's Bernanke endorses idea of second stimulus plan

* Stocks on Wall Street maintain gains (Recasts, updates prices, changes byline)

By Nick Olivari

NEW YORK, Oct 20 (Reuters) - The U.S. dollar rallied on Monday despite an improvement in risk appetite and a drop in interbank lending rates as companies bought the U.S. currency to meet their operational needs.

Analysts said the dollar also received a boost from Federal Reserve Chairman Ben Bernanke's testimony before Congress endorsing another stimulus plan for the sluggish economy.

A second package would reduce pressure on monetary policy to provide all the stimulus for the economy, although it could worsen the country's already huge budget deficit, they said.

"Liquidity is so thin ... companies and other financial institutions are using the dollar to cover all their finance needs," said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington, D.C.

Tight credit conditions and fears of a global recession have lent the dollar a safe-haven currency status.

Continuing efforts to bail out banks around the world, including the Dutch government's cash injection into ING and South Korea's pledge to pump funds into its financial system, pushed interbank dollar lending rates lower and revived interest in risky assets such as stocks.

"This is more a story about flows. There is still some real money demand for dollars out there," said Alan Ruskin, chief international strategist at RBS Global Banking in Greenwich, Connecticut.

"People feel risk is coming back, but it's not coming back against all currencies."

U.S. stocks rose, following other markets around the world from Asia to Europe as investors chose not to focus on a looming global recession.

EURO SURRENDERS GAINS

The euro slumped to session lows around $1.3287 <EUR=>, wiping out gains that lifted it as high as $1.3530 in overnight trade on the back of the improvement in risk appetite. It was last down 0.6 percent at $1.3322.

That lifted the ICE Futures U.S. dollar index, which measures the dollar's value against a basket of six currencies, 0.7 percent to 83.062 .DXY.

Some analysts said the dollar's strength could also be linked to Tuesday's payout on Lehman Brothers credit default swaps.

"That creates a technical demand for dollars. A lot of that has to be settled in dollars," said Boris Schlossberg, director of FX research at GFT Forex in New York.

The dollar's gains came despite London interbank offered rates for overnight dollars falling to a four-year low near the Federal Reserve's target rate of 1.5 percent. One-week and three-month rates fell by almost half a percentage point. LIBOR

"Demand for the buck will remain high at least until the presidential elections," said Tempus Consulting's Salvaggio.

"Until then, I would sell euros any time it gets close to $1.35 and buy it back when it touches $1.33."

Against the Japanese yen, the dollar was up 0.1 percent at 101.79 yen <JPY=>, after rising on Bernanke's endorsement of another stimulus package. The euro fell 0.5 percent to 135.63 yen <EURPJPY=>.

"To the extent there is some more fiscal stimulus in the works, that does take some of the pressure off monetary policy to provide all the stimulus that the economy needs," said RBS Global Banking's Ruskin.

"The market would react initially as dollar positive although quite frankly, there is some serious danger that here we go again and the budget deficit is just blowing out to such extraordinary proportions we have lost control in a way."

Sterling gave up earlier gains and was last down 0.8 percent at $1.7138 <GBP=>. The high-yielding Australian and New Zealand dollars clung to gains.

The Aussie dollar was last up 2.0 percent at US$0.7022 <AUD=>, while the Kiwi dollar advanced 2.0 percent to US$0.6239 <NZD=>. Against the Canadian dollar, the greenback rose 1 percent to C$1.1934 <CAD=>. (Additional reporting by Vivianne Rodrigues; Editing by Diane Craft) ((nick.olivari@thomsonreuters.com; +1-646-223-6151; Reuters Messaging: nick.olivari.reuters.com@reuters.net))

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