Dollar Rises as U.S. Lawmakers Prepare to Vote on Bank Rescue

By Ron Harui and Stanley White
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Sept. 29 (Bloomberg) -- The dollar rose against the euro and the pound after President George W. Bush and Congressional leaders agreed on a $700 billion plan to revive credit markets by purchasing banks' distressed debt.

Senate Majority Leader Harry Reid said the House of Representatives may consider the plan today and the Senate will vote by Oct. 1, helping to boost the U.S. currency. The British pound and the euro dropped to one-week lows versus the dollar as European governments intervened to prevent the failures of Bradford & Bingley Plc, Britain's biggest lender to landlords, and Fortis, the largest Belgian financial-services firm.

``The dollar is set up for a relief rally,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``The U.S. rescue package is on its way to becoming law. That goes a long way to help improve sentiment for the U.S. financial sector and the dollar.''

The U.S. currency rose to $1.4341 per euro as of 8:58 a.m. in London, from $1.4614 late in New York on Sept. 26, and traded at $1.4308, the strongest since Sept. 19. It was at 106.16 yen, from 106.01 yen at the end of last week. Against the pound, the dollar climbed to $1.8181, also the strongest since Sept. 19, before trading at $1.8106, from $1.8445.


`Market Disruption'

``Fears of further market disruption have eased,'' wrote Geoffrey Yu, a currency strategist in London at UBS AG, the world's second-largest foreign-exchange trader, in a research note today. ``The dollar has rallied on these developments.''

UBS said it is ``currently short'' the euro as a trade recommendation from $1.4644, with a target of $1.4250 and an automatic instruction to buy the currency at $1.4890 should the bet go the wrong way. A short position is a bet on a decline in an asset's price.

The pound fell as Bradford & Bingley became the third major British bank to run into trouble since global credit markets seized up last year. Northern Rock Plc was nationalized in February and HBOS Plc sold itself to Lloyds TSB Group Plc on Sept. 18.

``This news means financial-market turmoil is also appearing in Europe,'' said Toshihiko Sakai, head of trading in foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``European currencies may weaken.''

The U.K. Treasury said today in a statement that Banco Santander SA, Spain's biggest lender, will pay 612 million pounds ($1.1 billion), including a transfer of 208 million pounds of capital, to buy Bradford & Bingley branches and deposits.

European Bank Rescues

The euro also weakened as Belgium, the Netherlands and Luxembourg invested 11.2 billion euros ($16.3 billion) in Fortis to restore confidence in the company after its shares fell 35 percent last week. Fortis came under pressure because of speculation the bank would struggle to replenish capital depleted by the 24.2 billion euro takeover of ABN Amro Holding NV units last year and credit writedowns.

``The euro's bias is to go lower,'' said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan's second-largest publicly listed lender. ``Funding problems for the European financial sector mean the European Central Bank may have to lower interest rates sooner rather than later.''

The euro may decline to $1.4350 today, he said.

European policy makers will keep their benchmark rate at 4.25 percent when they meet on Oct. 2, according to a Bloomberg News survey of 58 economists.

Traders have pared bets the ECB will raise borrowing costs in coming months. The implied yield on the Euribor futures contract expiring in March fell to 4.615 percent today from 4.665 percent on Sept. 26.

Dollar Intervention

A growing number of currency traders and strategists are starting to speculate that finance ministers from the world's biggest economies will join to support the dollar. Volatility in currencies is the highest since 2000, when the so-called Group of Seven nations last intervened in the foreign-exchange market.

``We're getting closer to the right conditions for authorities to step in and prop up the dollar,'' said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement. ``The nightmare scenario will be a wholesale loss of confidence in the dollar.''

Implied volatility on one-month euro-dollar options rose to an eight-year high of 15.55 percent on Sept. 18, the same level that triggered the G-7 to buy euros in 2000 to halt the 27 percent slide from its 1999 debut. Volatility last stood at 14.71 percent, up from 14.51 percent at the end of last week.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net