Dollar May Fall for Second Day on Concern Over Fannie, Freddie

By Stanley White and Ye Xie

July 10 (Bloomberg) -- The dollar may fall against the euro for a second day on speculation losses may deepen at Fannie Mae and Freddie Mac, the largest sources of financing for U.S. home loans.

The dollar may also extend declines against the yen after Fannie Mae sold $3 billion of debt yesterday at record yield spreads over benchmark rates. The yen may advance against the Australian and New Zealand dollars as declining stocks prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency. Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson testify before Congress today on financial market regulation.

``Freddie Mac and Fannie Mae could be the catalyst for further dollar declines,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``The U.S. financial sector isn't healthy. Things are likely to get worse, and that isn't fully reflected in the value of the dollar.''

The dollar traded at $1.5733 per euro at 8 a.m. in Tokyo from $1.5743 yesterday. The U.S. currency bought 106.86 yen from 106.76 yen. The yen was at 168.10 per euro from 168.06. The dollar may fall to $1.58 per euro and 106 yen today, Amikura forecast.

Against the Australian dollar, the yen traded at 102.03 from 102.16. It was quoted at 80.85 per New Zealand dollar from 80.95. The Standard & Poor's 500 Index fell 2.3 percent yesterday.

In carry trades investors borrow in countries with low interest rates and invest in high-yielding assets elsewhere. Japan's 0.5 percent target lending rate compares with 7.25 percent in Australia and 8.25 percent in New Zealand.

Fannie Mae

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, fell 0.6 percent to 72.580 yesterday.

Fannie Mae's 3.25 percent benchmark notes priced to yield 3.27 percent, or 74 basis points more than comparable U.S. Treasuries, the Washington-based company said yesterday in an e- mailed statement. That's the biggest spread since Fannie Mae first sold two-year benchmark notes in 2000.

The dollar has fallen 11 percent against the euro since September, when the Federal Reserve made the first of seven reductions in its target lending rate, now 2 percent, to prevent the housing slump and credit market losses from plunging the U.S. economy into a recession.

Bernanke and Paulson are scheduled to testify before Congress at 10 a.m. today in Washington. The Fed may extend securities dealers' access to direct loans from the central bank into next year as long as emergency conditions continue, Bernanke said on July 8.

ECB, Inflation

European Central Bank President Jean-Claude Trichet told the European Parliament in Strasbourg, France, yesterday that the level of inflation is ``worrying.'' He also said it's important for the U.S. to repeat support for a strong currency.

Traders yesterday increased bets the ECB will raise borrowing costs again to curtail 4 percent annual inflation, twice policy makers' 2 percent target. The implied rate on the December Euribor interest-rate futures contract rose 0.02 percentage point to 5.12 percent.

Trichet said last week that he has ``no bias'' for monetary policy after increasing the ECB's main refinancing rate by a quarter-percentage point to 4.25 percent.

The yield advantage of two-year German bunds over comparable-maturity Treasury notes rose to a one-week high of 1.97 percentage points yesterday, making the European securities more attractive to investors.

``The risk is that the ECB will raise interest rates again,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``That will keep the euro relatively supported.''

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net