Dollar Falls on Speculation U.S. Bailout Plan to Increase Debt

By Stanley White

Sept. 22 (Bloomberg) -- The dollar fell for the first day in three against the yen on speculation a U.S. government plan to buy soured mortgage-related assets from banks will widen the country's budget deficit.

The dollar traded near a two-week low against the euro on speculation the combination of spending $700 billion on mortgage securities and $400 billion to guarantee money-market funds may rattle investors' confidence in the U.S.'s ability to repay debt.

``Problems with the U.S. deficit will haunt the dollar,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``This is a reason for the dollar to go lower. Spending such a large amount on this rescue package will remind traders that the fiscal health of the U.S. is set to worsen.''

The dollar fell to 106.99 yen as of 7:48 a.m. in Tokyo, from 107.45 in New York late on Sept. 19. The U.S. currency traded at to $1.4456 per euro, near a two-week low of $1.4541 reached on Sept. 18. The euro bought 154.70 yen from 155.46 yen. The dollar may decline to 106.30 yen today, Ishikawa said.

Treasury Secretary Henry Paulson's plan, sent to Congress Sept. 20, would mark an unprecedented government intrusion into markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also start a $400 billion Federal Deposit Insurance Corp. pool to insure investors in money-market funds.

Crushed

``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

The dollar fell against 14 of the world's most-traded currencies, including the euro, on Sept. 19 as Paulson unveiled the plan, which also sparked a 4 percent jump in the Standard & Poor's 500 Index. The plan may end the dollar rally that began in June and drove the U.S. currency up 10 percent versus the euro, 2 percent against the yen and almost 13 percent compared with Brazil's real, strategists said.

Paulson and Federal Reserve Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc. and Merrill Lynch & Co. was forced into the arms Charlotte, North Carolina- based Bank of America Corp.

Morgan Stanley dropped as much as 44 percent Sept. 17, the biggest one-day decline in its history, and Goldman Sachs Group Inc., where Paulson was chief executive officer from 1998 to 2006, lost 26 percent. Both are based in New York.

``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net