* Dollar falls against basket of currencies, yen also
slips
* Federal Reserve creates commercial paper-buying facility
* Fed Chairman Bernanke to speak later on Tuesday
(Recasts, adds comments, updates prices)
By Wanfeng Zhou
NEW YORK, Oct 7 (Reuters) - The U.S. dollar and the yen
fell after the Federal Reserve on Tuesday acted to prop up the
commercial paper market, which reversed some of the recent
stampede for safety.
Anxiety over the health of the global financial system
prompted investors to dump risky assets in recent sessions,
sending the dollar to a 13-month high and the yen to a
three-year peak against the euro on Monday. The dollar and the
yen are the primary beneficiaries of the recent surge in risk
aversion.
Trading was volatile, with the euro gaining as much as 3
percent against the yen before losing some of its gains as
investors continue to nervously eye the credit and stock
markets.
The Fed said Tuesday it set up a special-purpose facility
with the Treasury Department's blessing to buy commercial paper
in yet another emergency move aimed at calming chaotic
financial markets. For details, see [].
"They are going around putting out spot fires all over the
place. The commercial paper market was the latest to freeze up.
So it looks like they've decided to step in and relieve the
pressure there," said Brian Dolan, chief currency strategist at
Forex.com in Bedminster, New Jersey.
"It's risky asset positive, so stocks like it and the yen
crosses like it," he added.
In midday trading in New York, the euro <EUR=> was up 1.2
percent to $1.3645, rebounding from a low of around $1.3444 hit
on Monday, according to Reuters data, sparked by escalating
worries about the health of European banks.
The ICE Futures U.S. dollar index, which tracks the
greenback against a basket of six currencies, fell 0.9 percent
to 80.969 <.DXY>.
Against the yen, the dollar rose 0.4 percent to 102.21 yen
<JPY=>.
The Fed move lessened the need for big cuts to benchmark
lending rates, prompting a sell-off in U.S. interest rate
futures. This erased implied prospects for a possible 75
basis-point Fed rate cut this month, and pushed chances for a
50 basis-point cut as low as 86 percent. [].
"The Fed announcement to act as a backstop in the
(commercial paper) market is likely to have a positive reaction
in regard to sentiment," said Dustin Reid, senior currency
strategist at RBS Greenwich Capital in Chicago. "It should help
risk appetite on the margin."
BERNANKE AWAITED
The highlight of the day will be Fed Chairman Bernanke, who
will speak about the financial markets at 1:15 p.m. (1715 GMT),
with added investor interest following moves by other central
banks earlier in the session.
Overnight, the Reserve Bank of Australia stunned the market
with a 100 basis point rate reduction, stoking speculation that
other central banks would follow suit in a coordinated move to
combat the global credit crisis.
The move by the RBA "appears to have fostered some
speculation that we're going to see a round of interest rate
easing from major central banks in the very near future," said
Stephen Malyon, senior currency strategist at Scotia Capital in
Toronto.
"The Fed is being included in this speculation," he said.
"I think that makes Bernanke's speech today particularly timely
and important because he's either going to encourage or
potentially discourage Fed easing expectations."
The Fed is also scheduled to release the minutes from its
September policy meeting later in the session.
Currencies were whipsawed, hovering between extreme anxiety
over the global banking system and hopes that governments would
deliver a credible solution to the financial crisis.
The pound <GBP=> fell as low as $1.7322, its weakest since
April 2006 on Tuesday on renewed fears about the British
banking system. But it has since recovered to trade up 0.8
percent at $1.7568, with investors taking some comfort from
news that European states would provide guarantees to protect
bank depositors. [].
The Australian dollar last traded little changed at
US$0.7201 <AUD=>.
Other countries saw the fallout from the ongoing credit
crisis. Iceland's central bank said it had pegged the island's
crown to a basket of currencies at a level of 131 per euro.
[]
(Additional reporting by Steven C. Johnson and Gertrude
Chavez-Dreyfuss; Editing by Tom Hals)
