Dollar up as stocks dip on Fannie/Freddie plan

By Kevin Plumberg Reuters - Monday, July 14 08:12 am

HONG KONG (Reuters) - The U.S. dollar rose and government bonds slipped on Monday after Washington gave its backing to troubled mortgage firms Fannie Mae and Freddie Mac, but shares dropped on concern the global credit crisis is worse than previously thought.

Shares in global banking giant HSBC Holdings fell 2.2 percent, and shares of Mitsubishi UFJ Financial Group , Japan's biggest bank, as investors took the bailout as a sign the financial sector is in greater trouble than first thought because of the year-old credit crisis.

European shares were expected to open as much as 1.1 percent higher, according to financial bookmakers.

The U.S. plan was an attempt to reassure investors after Fannie Mae and Freddie Mac stock plummeted more than 40 percent last week on spiralling fears both companies, which are pillars of the housing market, were under capitalised and the credit crisis toppled a fifth U.S. bank.

Both companies, which are shareholder-owned but also government-sponsored, said they are adequately capitalized, but welcomed the measures and said they would help confidence.

"Steps to shore them up is a positive but the fact that they are having difficulties in the first place is just symptomatic of a difficult environment out there. And that makes it hard to get too positive," said Greg Goodsell, equity strategist with ABN AMRO in Sydney.

Japan's Nikkei share average finished 0.2 percent lower, led by Softbank Corp , which owns 41 percent of Yahoo Japan. Yahoo Inc rejected a takeover proposal from Microsoft Corp and investor Carl Icahn.

Shares in Asia-Pacific companies outside of Japan fell 1.1 percent on the day, according to an MSCI index .

Hong Kong's Hang Seng index fell 1.3 percent, with shares of HSBC and Industrial & Commercial Bank of China, the country's largest lender, among the biggest drags.

SAFETY FIRST

The timing of the U.S. government's plan was critical, ahead of a crucial debt issue by Freddie Mac on Monday and after U.S. bank regulators on Friday seized mortgage lender IndyMac Bancorp in the third-largest bank failure in U.S. history.

Results from major financial institutions this week, including JPMorgan Chase , Merrill Lynch and Bank of America , should offer some indication whether or not fallout from credit stress is worsening.

As part of the plan, the Federal Reserve offered Fannie and Freddie access to emergency cash through its discount window. The U.S. Treasury wanted to expand its line of credit to the two U.S. mortgage firms and said it would buy equity in them if needed.

The U.S. dollar enjoyed a relief rally, after slipping 0.8 percent against a basket of major currencies last week on concerns about the stability of the U.S. financial system.

The euro fell 0.5 percent to $1.5879 and the dollar rose 0.4 percent to 106.55 yen.

The recovering U.S. dollar knocked oil prices, which slipped 0.4 percent to $144.52 a barrel. However, ongoing tension between the West and Iran, the world's fourth largest crude exporter, provided a cushion.

The longer-term outlook for the dollar was darker, especially if the U.S. federal government is forced to nationalise the government-sponsored entities and load up its balance sheet with their debt.

"Such a development would significantly increase public debt and would be detrimental to U.S. credit ratings," said Ashley Davies, currency strategist with UBS in Singapore. "The uncertainty will likely deter foreign reserve managers from acquiring additional U.S. Treasury and agency debt and keep the dollar on the back foot for now," he said in a note.

The benchmark 10-year U.S. Treasury yield, which moves in the opposite direction to price, rose to 4.00 percent, up about four basis points from late Friday in New York, as bond investors ventured back into buying debt issued by Fannie and Freddie.

Japanese government bond futures fought back to positive as the Nikkei declined on the day.

Investors have been committed to a safety-first style of investing lately because of the bear market in global equity markets, high inflation in almost every region of the world and sluggish growth rates. As a result, money market funds have ballooned, taking in $27 billion in new money so far this year, according to Boston-Based EPFR Global, which tracks $10 trillion in assets.

"While some of the inflows to Money Market Funds can be attributed to investors returning cash deployed to take advantage of the arbitrage opportunities at the end of the second quarter, some of it is just good, old fashioned flight to safety," said EPFR Global Managing Director Brad Durham in a note.

(Additional reporting by Geraldine Chua in Sydney; Editing by Louise Heavens)

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