Dollar Trades Near 1-Month High on Fannie, Freddie Rescue Bill

By Stanley White and Kosuke Goto

July 24 (Bloomberg) -- The dollar traded near a one-month high against the yen after U.S. lawmakers approved a bill that allows Treasury Secretary Henry Paulson to bail out Fannie Mae and Freddie Mac.

The currency was also near a two-week high against the euro as a rally in financial stocks prompted traders to increase bets the Federal Reserve will raise interest rates. The New Zealand dollar fell to a six-month low after the country's central bank unexpectedly cut rates for the first time in five years.

``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 107.88 yen at 10 a.m. in Tokyo, little changed from yesterday. It earlier reached 107.98, the highest since June 26. The U.S. currency was at $1.5681 per euro, after touching $1.5670, the strongest since July 9. The yen traded at 169.16 per euro from 169.36, after yesterday reaching a record low of 169.96.

The kiwi, as New Zealand's currency is known, slid to 74.21 U.S. cents, the lowest since Jan. 22, before trading at 74.37 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, was at 72.799 after yesterday rising to 72.854, the strongest since July 9.

Crude oil for September delivery slid 0.2 percent to $124.19 a barrel, extending a 2.7 percent decline yesterday. 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.

The House of Representatives yesterday approved a rescue package for Fannie Mae and Freddie Mac that gives Treasury Secretary Paulson authority to buy shares in and lend funds to Fannie Mae and Freddie Mac, and provides for a federal agency to insure refinanced home loans. The bill has still to pass through the Senate.

The dollar fell to a record $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.

Rate Increase?

``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 on 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 ``softening in their overall economies,'' the Fed said.

Fed's Plosser

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.

The euro may weaken for a third day against the dollar on speculation an industry report today will show German business confidence fell to the lowest level in more than two years in July.

The Ifo institute will say its business climate index declined to 100.1, the weakest since December 2005, from 101.3 in June, according to the median of 40 forecasts in a Bloomberg News survey. Ifo will release the report, based on a survey of 7,000 executives, at 10 a.m. in Munich.

``The euro looks weak, going into today's Ifo data,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``With the European economy slowing, the markets will likely raise expectations of a rate cut by the ECB.''

Deutsche Bank, Germany's biggest bank by assets, predicts the European Central Bank will lower rates in the first quarter and the euro may fall to $1.45 against the dollar by year-end, Fukaya said.

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