Fannie, Freddie news boosts greenback vs yen

Reuters | Monday, 08 September 2008

The US dollar fell against the euro but climbed on a sliding yen on Monday after the US government seized control of mortgage companies Fannie Mae and Freddie Mac to shore up the US housing market and protect against more global financial turbulence.

The Japanese currency was the major loser as the move seemed to lessen one major risk to global financial markets and the US economy, reversing last weeks' broad surge on a flight to safety.

"The news was seen as supportive for the US financial sector and this triggered widespread buying back of short yen cross positions," said Bank of New Zealand currency strategist Danica Hampton.

The yen had shot higher last week as growing risk aversion led investors to cut back leveraged carry trades funded in the Japanese currency.

Now some of that process is reversing, knocking the yen broadly lower while boosting the euro and commodity currencies like the Australian dollar.

"It's all that shift in sentiment and positioning that's swinging the price actions," said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Securities.

The euro jumped to 155.35 yen up 1 percent from late in New York on Friday and shot as high as 156.93 yen on trading platform EBS in early Asian trade.

Against the dollar, the euro rose 0.5 percent to $1.4334 off an 11-month low of $1.4197 touched last week.

The dollar climbed 0.7 percent to 108.55 yen and touched as high as 109.05 on EBS, while the Australian dollar jumped more than 2 percent to 89.69 yen sharply above a two-year low of 84.98 yen hit last week.

The dollar index, which tracks the value of the greenback against a basket of six currencies, was up slightly at 78.573.

On Friday, the dollar ended higher against the euro, though it came off an 11-month high of $1.4197 after data showed a jump in the unemployment rate as the US economy lost jobs for the eight month in a row.

The takeover on Sunday of the two mortgage giants, which own or guarantee half of the country's $12 trillion in outstanding home mortgage debt, followed growing concern about the mounting losses at both of them, undermining them as other sources of house lending have dried up.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," US Treasury Secretary Henry Paulson said at a news conference. "Fannie Mae and Freddie Mac are critical to turning the corner on housing."

The high yielding New Zealand and Australian currencies recouped some of their recent sharp losses as risk aversion calmed just a little.

The kiwi rose 1.3 percent to $0.6774 and the Aussie gained 1.4 percent to $0.8280.