Dollar rises on U.S. Treasury plan to stabilize Fannie, Freddie

Posted Jul 14th 2008 11:11AM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Federal Natl Mtge (FNM), Housing, Federal Reserve

Traders on the long side of dollar trades cheered the U.S. Treasury's plan to shore-up Fannie Mae and Freddie Mac, as the dollar rose against the world's other major currencies.

The dollar strengthened about one-half cent to $1.5874 versus the euro and two-tenths of a yen to 106.46 versus Japan's yen in Monday morning trading. The dollar was virtually unchanged against the British pound at $1.9877.

On Sunday night, U.S. Treasury Secretary announced a sweeping rescue package and asked Congress for the authority to buy unlimited stakes in and lend to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), aiming to head-off a collapse in confidence, Bloomberg News reported Monday. Separately, the U.S. Federal Reserve approved Fannie's and Freddie's ability to borrow directly from the central bank.

'Wait and see approach'

Currency Trader Andrew Resnick told BloggingStocks Monday even though the currency and stock markets have initially reacted favorably to the Treasury's / Fed's measures, many currency traders are taking a "wait and see approach" until they know what financial form the assistance to Fannie and Freddie is likely to take.

"I have to underscore here that additional government debt, by itself, will not bolster the dollar, but if the overall [Fannie, Freddie] bailout package is viewed as getting to the core of the mortgage sectors' problems and checking a collapse in confidence, that would be favorable for the dollar," Resnick said. Resnick added that he is presently flat, or has no open currency trading positions.

Resnick added that in his interpretation, the currency markets "would rather see increased government spending or a line of credit from the Fed" if it has the effect of "maintaining confidence in the bond market and the ability of bonds to price. Another freezing-up of the bond and credit markets benefits no one," he said.

The Treasury's and/or Fed's plans would enable the currency markets "to gradually adjust currency values, as appropriate, depending on each currency's fundamentals," he said, adding that "It also would avert a collapse in the dollar, which almost everyone agrees is a situation the global markets need to guard against."

Tags: bond market, British pound, credit markets, dollar, euro, Fannie Mae, FannieMae, FNM, foreign exchange, FRE, Freddie Mac, inthenews, mortgages, U.S. Treasury, yen