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

By Kosuke Goto and Stanley White

July 28 (Bloomberg) -- The dollar traded near a one-month high against the yen after Congress passed legislation to prop up Fannie Mae and Freddie Mac, the two largest providers of U.S. mortgage financing.

The currency was also near a three-week high versus the euro on speculation a government report this week will show the U.S. economy expanded last quarter at more than twice the annual pace of the prior three months. The Chinese yuan fell for the first time in three days on speculation the government will slow gains in the currency to support exports as growth slows.

``The rescue plan is supportive for the dollar,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``It relieves the anxiety about the U.S. housing slump.''

The dollar rose to 108.07 yen, the highest level since June 26, before trading at 107.79 yen at 6:04 a.m. in London, from 107.84 on July 25 in New York. It was at $1.5718 a euro, from $1.5709. The euro traded at 169.41 yen, near a record 169.96 set July 23 and unchanged from 169.52 at the end of last week.

The greenback may rise to as high as 108.60 yen should it break through 108.30 yen today, Saito forecast.

The U.S. Congress sent to the president legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Great Depression in the 1930s. President George W. Bush will sign the measure into law, a spokesman said.

Won, Yuan

The South Korean won rose 0.3 percent to 1,005.80 against the dollar after the nation posted a current-account surplus for the first time in seven months in June. The won is headed for its strongest month since January 2006 after the government bought the currency to help curb inflation.

The Chinese yuan fell 0.1 percent to 6.8266 per dollar after the Communist Party's Politburo said on July 25 growth and inflation are both priorities, fueling speculation the government will curb currency appreciation to aid exporters. The yuan has strengthened 7 percent this year, the most among Asia's 10 most-traded currencies outside Japan.

The Australian dollar was little changed at 95.56 U.S. cents. It earlier fell to an almost three-week low of 95.27 cents after Australia & New Zealand Banking Group Ltd., the nation's fourth-biggest bank by market value, joined National Australia Bank Ltd., the largest, in warning of increased provisions for non-performing loans.

Weaker Aussie

Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

Home Prices

Gains in the U.S. dollar may be limited by speculation that declines in home prices and employment will make it difficult for the Federal Reserve to raise interest rates.

Home prices in the S&P/Case-Shiller index fell by 16 percent in May from a year ago, the most on record, according to a Bloomberg News survey before the release tomorrow. U.S. nonfarm payrolls fell by 75,000 in July, following a decline of 62,000 in June, according to a separate survey. The Labor Department will release the data on Aug. 1.

``Data on housing and payrolls pose downside risks to the dollar,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Given the state of the housing market, you can't be overly optimistic on the U.S. economy. That makes it almost impossible for the Fed to raise rates.''

The dollar may fall to 106 yen this week, he said.

Futures on the Chicago Board of Trade show a 93 percent chance the Fed will keep borrowing costs on hold at 2 percent when it announces its next decision on Aug. 5, up from 64 percent a month ago.

U.S. GDP

U.S. gross domestic product expanded an annualized 2.3 percent in the second quarter, faster than 1 percent growth in the previous quarter, according to a Bloomberg News survey. The government will release the data on July 31.

Consumer spending accelerated to a 1.5 percent gain in the quarter, the survey shows, as the U.S. handed out tax rebates to support the economy. As of yesterday, the government had already distributed almost 80 percent of the more than $100 billion in tax rebates, Treasury figures show.

``Any dollar gains after the GDP report are likely to prove temporary,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader, in a research note today. ``Growth due to fiscal stimulus is a one-off that will fade away in the second half of the year.''

German Confidence

The euro may weaken on speculation an industry report today will show German consumer confidence fell for a third month as soaring energy prices sapped people's purchasing power. GfK AG's index for August probably declined to 3.5 from 3.9 for July, the Nuremberg-based market-research company will say today, according to a Bloomberg News survey of economists.

``The European economy is facing a major setback,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America in Tokyo, wrote in a research note today. ``The markets cannot price in an ECB rate hike any more. We are recommending euro- selling against the dollar.''

Europe's single currency may fall to $1.54 against the dollar by the end of September, she said.

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