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Dollar strengthens as Treasury and Fed seek stake in Freddie and Fannie

Mon, Jul 14 2008, 12:49 GMT
by Benny Menashe

Finotec Group Inc.

The dollar rose for the first time in four days against the euro after U.S. Treasury Secretary Henry Paulson announced funding plans for Freddie Mac and Fannie Mae to restore confidence in financial markets. The currency climbed against the yen after Paulson asked Congress for the authority to buy unlimited stakes in the two largest U.S. mortgage finance companies and the Federal Reserve offered them loans through its discount window. ``Speculators who sold the dollar are now sure to buy it back,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``Paulson is basically saying he won't let Freddie Mac and Fannie Mae fail as they play an important role in the U.S. financial system.'' EUR/USD currently trading at 1.5886 as of 7:50 am, GMT.

A growing number of the world's biggest investors say a slowdown in the euro zone region economy may be more severe than in the U.S., forcing the European Central Bank to reverse this month's rate increase. By January, the euro will be lower against the dollar, yen and even the pound, according to traders and economists. Bill Gross, manager of the world's biggest bond fund, turned bearish on the euro for the first time since the currency's inception in 1999. ``We might have hit a point where the euro doesn't have a lot to stand on,'' said Emanuele Ravano, co-head of European strategy in London for Gross's Pacific Investment Management Co., which runs the $129 billion Pimco Total Return Fund. ``The euro is ultimately much overvalued. It could be quite a bit lower at some point in time over the next couple of years.''

The euro fell as much as 1.7 percent to $1.5611 in the week following President Jean-Claude Trichet's comments on July 3 that he had ``no bias'' on further changes in borrowing costs after boosting the main refinancing rate to 4.25 percent from 4 percent. Before Trichet spoke the currency traded near a record high on speculation the ECB would signal more than one rate increase was needed to tame inflation. On the other hand the pound rose against the euro, snapping two days of declines. It slipped versus the dollar. The U.K. currency was at 80.04 pence per euro as of 6:43 a.m. in London, from 80.15 July 11. It fell to $1.9836, from $1.9888.

Today's Economic Events

Published on  Mon, Jul 14 2008, 12:56 GMT

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