* Concerns on how illiquid assets will be priced in plan
* Banks worldwide still struggle in crisis of confidence
* Risk reduction trend has likely not reversed
(Recasts, updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Sept 29 (Reuters) - The U.S. dollar rose against
the euro on Monday as a banking crisis worsened in Europe,
while Asian stocks fell 2 percent on questions on the
effectiveness of a U.S. government plan to save the financial
system from ruin.
European stock market futures <STXEc1> pointed to falls of
about 1 percent on evaporating confidence in the financial
sector.
The proposal to establish a $700 billion fund to buy
illiquid securities will be sent to Congress later on Monday
after days of tense negotiations and compromises.
A confidence-boosting rescue package cannot come quick
enough for bankers and policymakers after the Belgian, Dutch
and Luxembourg governments were forced to rescue financial firm
Fortis <FOR.BR> over the weekend to prevent a domino-like
spread of failure. []
In addition, the British government will take over mortgage
lender Bradford & Bingley <BB.L>, people in the bank industry
familiar with the matter told Reuters, sending the pound and
the euro lower across the board.
After the U.S. financial system nearly imploded this month
in the wake of the bankruptcy of Lehman Brothers <LEHMQ.PK>,
the rescue of American International Group <AIG.N> and the
demise of the investment banking model, the plan to stem the
crisis met strong resistance from some policymakers who balked
at cutting such a big check to the White House.
"Now the devil is in the details. There have been so many
constraints put on the deal that any one of those could
completely limit its effectiveness," said Tim Rocks, equity
strategist with Macquarie Securities in Hong Kong.
"Ultimately for the banks to believe each other again,
trust each other and start lending, they just all need more
capital. The big question is whether this plan actually
achieves that."
Hong Kong's Hang Seng index led the region lower, falling
2.1 percent largely on weakness in financial sector shares.
Ping An Insurance stock <2318.HK> dropped 9.5 percent after the
bailout of Fortis, in which the second-largest Chinese insurer
has a 5 percent stake.
Japan's Nikkei share average <> posted a 1.3 percent
decline, erasing earlier gains, as exporter stocks like Toyota
Motor Corp <7203.T> accelerated their decline.
The MSCI index of Asia-Pacific stocks outside of Japan
<.MIAPJ0000PUS> fell 2 percent, after chalking up four
consecutive weeks of declines.
The December U.S. S&P 500 future was down 1.2 percent
<SPc1>, reversing initial gains on news the plan was set for a
vote in the House of Representatives.
SAFETY VS RISK
Washington's bailout package, though unpopular with the
public and doubted by some analysts, is the biggest effort yet
by the U.S. government to ease the worst global financial
crisis since the Great Depression. Yet it alone has not been
enough to reverse a powerful move by global investors to purge
their portfolios of risk.
"The package will improve liquidity in the system. But I
don't think lenders are going to go out carte blanche and
provide new capital to the market in an aggressive way," said
Leigh Gardner, head of equities distribution for ABN AMRO in
Australia. "The availability of credit has definitely changed,
and this is not going to avert that situation."
For investors, safety is highly prized, and for now that is
being found in U.S. assets and highly-liquid short-term funds.
Last week, U.S. equity funds took in $10 billion in fresh
investment and money market funds saw $11 billion in new money,
according to Boston-based EPFR Global, a research firm that
tracks $10 trillion in assets.
The dollar benefited from some of those flows.
The euro fell 0.4 percent to $1.4460 <EUR=>, down 4 cents
from a one-month high hit a week ago.
Sterling dropped 0.7 percent to $1.8257 <GBP=> after
touching a one-month high on Thursday.
The dollar was largely unchanged against the yen at 106.33
<JPY=> and up 0.3 percent against the Swiss franc at 1.0972
francs <CHF=>.
CAUTION REIGNS
Some measures of money market tension and fear among
investors have come down from extreme levels reached in the
last few weeks, but they remain elevated. The spread of the
rate on 3-month eurodollar futures over the 3-month U.S.
Treasury bill yield, also known as the TED spread <TED>,
narrowed to 247 basis points from 272 basis points late on
Friday.
Tight credit and plunging asset values meant financial
firms continued to battle for survival of the fittest.
Wachovia Corp <WB.N> was in talks with rivals Citigroup
<C.N> and Wells Fargo <WFC.N> over a possible takeover, sources
said. []
Spot gold <XAU=> fell 1 percent to $874.80 an ounce, though
it is up around 14 percent in the last two weeks, living up to
its traditional role as a safe haven.
(Additional reporting by Sonali Paul in MELBOURNE; Editing by
Lincoln Feast)
