Euro Falls Against Dollar as Dexia Gets $9.2 Billion Bailout

By Kim-Mai Cutler and Andrew Macaskill

Sept. 30 (Bloomberg) -- The euro fell a second day against the dollar as France and Belgium led a state-backed rescue of Dexia SA, the world's biggest lender to local governments.

The 15-nation currency also weakened against the British pound after Belgian Prime Minister Yves Leterme said Dexia will receive about $9.2 billion to shore up its capital. The dollar rose against the yen on speculation the U.S. Senate will salvage a $700 billion bank-bailout plan as early as tomorrow after Congress rejected it yesterday. The yen dropped against 14 of the 16 most active currencies as European stocks rose, reviving purchases of higher-yielding currencies funded in Japan.

``This isn't just about Wall Street, there's very bad news in Europe that will need to be countered by new measures,'' said Stephen Jen, the global head of currency research at Morgan Stanley in London. ``What's notable is how well the dollar has held up against the euro and pound despite the bailout's rejection yesterday.''

The euro fell to $1.4315 at 7:52 a.m. in New York, from $1.4434 yesterday. The yen slid to 150.55 per euro from 150.38. It earlier reached 148.84, the strongest since Sept. 17. The yen also weakened to 105.17 per dollar from 104.18, after earlier reaching 103.54, the most since Sept. 16.

Dexia is being rescued after its shares had a record decline yesterday. The capital infusion comes two days after Belgium, the Netherlands and Luxembourg rescued Fortis, the largest Belgian financial-services company, Britain took control of Bradford & Bingley Plc, the country's biggest lender to landlords, and Germany bailed out Hypo Real Estate Holding AG.

`Coming Out a Winner'

European banks are being squeezed amid a surge in borrowing costs as lenders hoard cash on concern more financial institutions will fail. The euro interbank offered rate, or Euribor, that banks charge each other for one-month loans climbed to a record 5.05 percent today, the European Banking Federation said.

The U.S. Senate will try to revive a $700 billion financial-rescue package after yesterday's defeat in the House of Representatives. The bill would have allowed the government to buy troubled assets from banks. Institutions posted $590 billion of losses and writedowns since the start of last year follwing the collapse of the U.S. subprime-mortgage market.

``Although the U.S. is at the center of all the problems going on in the markets, rather counter-intuitively the dollar is coming out of it a winner,'' said Adam Cole, head of global currency strategy in London at RBC Capital Markets.

Carry Trades

Higher-yielding currencies recouped losses against the Japanese yen as Europe's benchmark Dow Jones Stoxx 600 Index gained 0.5 percent. The Australian dollar rose 1 percent to 84.65 yen after falling 4.9 percent yesterday. The New Zealand dollar gained 1.3 percent to 70.97 yen after dropping 3.7 percent yesterday.

``I would be very cautious in betting on further near-term dollar-yen losses,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``Any positive news on the political front would have quite an impact.''

The yen typically declines when demand for high-yielding currencies rises, as traders put on so-called carry trades. In such transactions, investors get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 7 percent in Australia and 7.5 percent in New Zealand.

The yen rose the most of all 16 most-actively traded currencies yesterday after the Standard & Poor's 500 Index plunged the most since the 1987 crash.

The Japanese currency is up 10 percent against the euro this quarter. The dollar has fallen 1.4 percent against the yen, paring a 7 percent gain in the previous three months. The euro is down 9.6 percent against the dollar, its biggest quarterly decline since 1999.

Implied volatility on one-month euro-dollar options rose to 16.4725 percent, or the highest in almost eight years. On Sept. 18, it reached 15.55 percent, the same level that triggered the Group of Seven nations to buy euros in 2000 to halt the 27 percent slide from its 1999 debut.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net