Dollar Advances After U.S. Senate Approves Bank Rescue Bill

By Ron Harui and Stanley White

Oct. 2 (Bloomberg) -- The dollar rose against the euro, approaching a one-year high, after the Senate approved a $700 billion bank-rescue bill, bolstering expectations the U.S. will act faster than Europe to address the seizure in credit markets.

The U.S. currency also gained on increased demand for dollar funding outside the nation, reflecting banks' reluctance to lend to each other. The euro traded near a two-year low versus the yen on speculation European Central Bank President Jean-Claude Trichet will say the shortage of credit reduces the need for higher interest rates at a meeting today.

``Market consensus is that the U.S. bill will eventually pass in some kind of form, while Europe hasn't yet taken steps in a unified manner,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``The package is likely to reduce worries over the U.S. and bolster the dollar.''

The dollar advanced to $1.3963 per euro at 7:45 a.m. in London, from $1.4009 late yesterday in New York. It touched $1.3882 three weeks ago, the strongest since Sept. 18, 2007. The currency traded at 105.75 yen from 105.71 yen. The euro fell to 147.60 yen from 148.11 yen yesterday, approaching a two-year low of 147.04 yen reached Sept. 16.

The Senate voted 74-25 in favor of legislation that links the rescue plan for financial companies to an increase in bank- deposit-insurance limits and tax breaks, after the House of Representatives rejected an earlier version of the bill. The House will likely take action on the latest version on Oct. 3, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi.

`Supportive' of Dollar

``The Senate's approval may alleviate concerns over the U.S. a bit,'' said Tsutomu Soma, a bond and currency trader at Okasan Securities Co. in Tokyo. `

The dollar rose against 13 of the 16 most-active currencies today as the London interbank offered rate, or Libor, that banks charge each other for one-month dollar loans climbed yesterday to the highest since January. The dollar rose 3.1 percent to 1,223.75 South Korean won. It climbed 0.5 percent to 8.2822 South African rand.

Foreign banks are paying near the highest premiums in at least a decade to borrow in dollars in the swaps market even after the Federal Reserve increased funds available to other central banks this week to $620 billion.

``The ability to secure funds in the money market hasn't improved in the slightest,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``This should support the dollar as banks that need the currency will simply buy it outright in the foreign-exchange market.''

Cross-Currency Swaps

The price on one-year cross-currency basis swaps between euros and dollars reached minus 120 basis points on Sept. 30, the largest effective premium for dollar borrowing in swaps since the euro's 1999 debut, according to data compiled by Bloomberg. The price averaged close to zero from 1999 to the start of the subprime-mortgage market collapse in August 2007.

A negative swap price indicates investors are willing to receive reduced interest payments on the euros they lend to obtain the needed financing in dollars.

Cross-currency basis swaps are agreements in which a trader borrows in a currency and simultaneously lends in a different one. The transaction involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

Gains in the dollar may be limited as U.S. stock futures declined after the Senate vote on speculation House legislators may reject the bill for a second time when they vote tomorrow.

Standard & Poor's 500 Index futures expiring in December fell as much as 1.2 percent, erasing earlier gains. The MSCI Asia Pacific Index of regional shares also declined as much as 1.9 percent after the vote.

Stock Futures

``U.S. stock futures are down a lot after the vote, and that's one reason to sell the dollar,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``There's still some doubt whether this bill will pass the House.''

The dollar may decline to 105.50 yen today, he said.

The euro may fall for a fourth day against the dollar before today's meeting of the European Central Bank at which policy makers are forecast to keep the main refinancing rate at 4.25 percent.

``The euro is under downward pressure ahead of the ECB meeting, where President Trichet may increasingly highlight downside risks to growth,'' said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp. in Singapore.

The euro may decline to as low as $1.3880 today, Ng said.

Traders raised bets the ECB will cut rates in coming months. The implied yield on the Euribor futures contract expiring in March fell to 4.320 percent from 4.350 percent yesterday. Policy makers will keep the benchmark rate unchanged today, according to all 58 economists surveyed by Bloomberg News.

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