Dollar Rises to Two-Week High on Paulson, Plosser's Comments

By Kosuke Goto and Stanley White

July 23 (Bloomberg) -- The dollar rose to a two-week high against the yen after Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.

The greenback traded near a two-week high versus the euro and the Swiss franc as Paulson said he expects Congress to approve a rescue plan for Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies. The yen fell to a record low against the euro as stocks climbed, encouraging investors to add to holdings of higher-yielding assets funded in the Japanese currency.

``The dollar got a lot of support from U.S. officials,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo, France's second-largest bank by market value. ``The Fed official's comments were very hawkish. Paulson's remarks helped ease concern over troubled government- sponsored enterprises.''

The dollar rose to 107.83 yen as of 7:56 a.m. in London, the highest level since July 9, from 107.33 in New York yesterday. It also gained to $1.5760 per euro from $1.5783 yesterday. The currency may rise to 107.80 yen today, Saito said.

The yen fell to a record low of 169.96 yen from 169.43 yesterday after the MSCI Asia Pacific Index of regional stocks rallied 1.8 percent on speculation bank earnings will withstand tighter credit markets.

Calmer Markets

``With the markets calming down, shown by the rally in stocks, the yen is becoming particularly weak among major currencies,'' said Shigetake Nakayama, a manager on the proprietary-trading desk in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second-largest financial group. ``With rates still low, there is no reason to buy the yen.''

The yen may fall to 108 a dollar today, Nakayama forecast.

The dollar traded at 1.0318 versus the Swiss franc, close to the highest since July 10, from 1.0311. The franc has gained 10 percent this year as U.S. bank losses widened.

The South Korean won rose 0.4 percent to 1,013.70 against the dollar on speculation oil prices near a six-week low will temper demand for dollars.

The Chinese yuan fell 0.1 percent to 6.8297 versus the dollar. China will slow the yuan's gains to about 3 percent in the second half of the year to help exporters weather a decline in global demand and rising costs, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences in Beijing.

Dollar Gains

The dollar's gains against the yen may accelerate after the U.S. currency closed above its 200-day moving average for the first time since Aug. 8, said Toru Umemoto, chief currency strategist at Barclays Capital Inc. in Tokyo.

``This is why the markets are getting more and more bullish on the dollar,'' said Umemoto, who works for a unit of the U.K.'s third-biggest bank. The dollar may rise to 110 yen in three months, Umemoto forecast.

The U.S. currency strengthened yesterday as Paulson said in a speech in New York he's confident that lawmakers will pass a bill to provide funding for Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing. He reiterated that a strong dollar is ``really very important.''

``This goes well beyond the two institutions -- Fannie and Freddie,'' Paulson said in an interview with Bloomberg Television after his speech. ``It has to do with investors in the United States and investors all over the world.''

The U.S. currency touched a record low of $1.6038 per euro on July 15 as traders speculated the two companies, which own or guarantee almost half of the $12 trillion in outstanding U.S. home loans, would be forced to seek a bailout.

Overseas investors' net purchases of Fannie Mae, Freddie Mac, and other so-called agency debt, were $24.2 billion in May the Treasury Department said on July 16. That compares with the $67 billion foreign investors spent on U.S. stocks, notes and bonds that month, Treasury data show.

`Further Declines'

``Paulson is trying to prevent further declines in dollar assets given that foreign investors' purchases of agency bonds are one source of funding for the U.S. current-account deficit,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote today in a research note.

The current account is the broadest measure of trade. An economy with a deficit relies on overseas investment to make up for its own savings shortfall.

Philadelphia Fed President Charles Plosser said in a speech yesterday in King of Prussia, Pennsylvania, that the U.S. central bank should raise interest rates ``sooner rather than later.'' He argued against cuts in two Fed decisions this year.

Futures traded on the Chicago Board of Trade showed yesterday a 49 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 23 percent odds a week earlier. Policy makers next meet Aug. 5.

Narrowing Spread

The U.S. two-year Treasury note yields 186 basis points less than the comparable-maturity German bund, the narrowest difference since July 11.

Gains in the dollar may be limited as the Fed releases its so-called beige book report, a survey of regional economic performance, at 2 p.m. today in Washington. Economic growth was ``generally weak'' in April and May as consumer spending slowed, the Fed said in its June 11 report.

``The beige book will hold a bearish tone on the economy while mentioning rising inflationary pressure,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd. ``We don't expect any rate hike by the Fed this year. With the markets still pricing a rate hike, this will push down the dollar'' to 103 yen by year-end, he said.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net