Dollar Is Near 1-Month High as Fannie, Freddie Rescue Advances

By Stanley White and Ye Xie

July 24 (Bloomberg) -- The dollar traded near a one-month high against the yen after U.S. legislation to rescue Fannie Mae and Freddie Mac moved closer to being signed into law.

The currency was also near a two-week high against the euro after the House of Representatives voted for measures to support the two largest buyers of U.S. mortgages, sending the bill to the Senate. Traders increased bets the Federal Reserve will raise interest rates as government efforts may stem a record surge in mortgage foreclosures. New Zealand's dollar fell to a six-month low after its central bank unexpectedly cut borrowing costs for the first time in five years as the economy slows.

``The rescue plan will give the dollar some measure of support,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It seems the U.S. government has avoided the worst-case scenario for Fannie and Freddie.''

The dollar traded at 107.93 yen at 7:58 a.m. in Tokyo, little changed from yesterday. It earlier reached 107.98, the highest since June 26. The U.S. currency was at $1.5691 per euro, after touching $1.5670, the strongest since July 9. The yen traded at 169.33 per euro, near a record low of 169.96 reached yesterday.

The kiwi, as New Zealand's currency is known, slid to 74.21 U.S. cents, the lowest since Jan. 22, before trading at 74.49 cents, from 75.16 cents late yesterday in Asian trading. The Reserve Bank of New Zealand cut its benchmark interest rate by a quarter of a point to 8 percent.

``Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower rates further,'' Governor Alan Bollard said today in a statement in Wellington.

Dollar Index

The Dollar Index on the ICE market, which tracks the greenback against the currencies of six U.S. trading partners, touched 72.797 yesterday, the strongest since July 9.

Crude oil for September delivery dropped 2.1 percent to $125.67 a barrel. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

Housing Bill

U.S. lawmakers and administration officials expect the rescue package will be passed in the Senate and signed into law by President George W. Bush. The bill gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac, and provides for a federal agency to insure refinanced home loans.

The dollar fell to a record of $1.6038 per euro on July 15 as traders speculated that Fannie and Freddie, which own or guarantee almost half of the $12 trillion in outstanding home loans, would be forced to seek a bailout.

``A week ago the market was looking into the abyss,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. ``Now people are able to take a step back. The dollar is firming.''

Futures traded on the Chicago Board of Trade showed yesterday a 57 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point by Sept. 16, up from 49 percent odds July 22. Policy makers next meet Aug. 5.

All 12 of the Fed's regional bank districts reported ``elevated or increasing'' prices in June and July, the central bank said in its regional economic survey, known as the Beige Book for the color of its cover. Five of the districts reported ``a weakening or softening in their overall economies,'' the Fed said.

Philadelphia Fed President Charles Plosser said yesterday that he couldn't rule out an increase in borrowing costs even as housing prices drop.

``The question becomes how long are we willing to allow the pressure from a fairly accommodative monetary policy stance'' to last ``before it begins to feed broad-based inflation,'' Plosser said in an interview with Bloomberg News.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at Yxie6@bloomberg.net