* Dollar up but trims gains after Senate OKs bailout
* Investors nervous about outcome of second House vote
* Money market strains spark dollar scramble
By Eric Burroughs
TOKYO, Oct 2 (Reuters) - The dollar climbed near a one-year
peak against a basket of currencies on Thursday but surrendered
some gains after the U.S. Senate passed a $700 billion bank
bailout plan seen as crucial to helping resolve the year-long
credit crisis.
Investors were nervous about whether the House of
Representatives would also approve the sweeping rescue plan
after its rejection at the start of the week sparked the biggest
one-day drop in the S&P 500 <.SPX> since the 1987 crash.
"The House is the problem," said a senior currency trader in
Hong Kong.
House Financial Services Committee Chairman Barney Frank
told CNN the bill was more likely to pass in the House but the
outcome was still uncertain.
The dollar has surged this week because the financial crisis
has started taking a toll on European banks, hitting the euro
and pound. European leaders were at loggerheads in debating a
U.S.-style financial resue.
Banks and funds have also scrambled to buy the greenback on
the open market because they are all but shut out from borrowing
funds in frozen money markets, with players fearing potential
defaults by counterparties since the demise of Lehman Brothers.
At the same time, U.S. investors are believed to be bringing
home funds from their huge overseas holdings of stocks and
bonds, giving the dollar a boost.
The confluence of factors has pushed the euro and sterling
down about 3 to 4 percent against the dollar so far this week.
The Senate voted 74-25 in favour of the huge spending bill
that would give the Treasury the authority to buy toxic
mortgage-related assets to help stem the massive asset
write-downs gripping the global financial system. []
"Assuming that the House does pass it Friday we should see a
rebound in global asset markets and some retracement in the
dollar," said Callum Henderson, chief currency strategist at
Standard Chartered in Singapore.
The dollar index, a gauge of its performance against six
major currencies, rose 0.2 percent to 79.899 <.DXY> -- near a
one-year peak struck last month but off a high of 80.025 hit
before the Senate vote.
The dollar was little changed at 105.79 yen <JPY=> but was
well off a four-month low of 103.50 yen struck earlier in the
week.
The euro dipped around 0.4 percent to $1.3954 <EUR=> and was
near a one-year low of $1.3882 struck last month. The euro fell
about 0.4 percent against the yen to 147.56 yen <EURJPY=R>.
Some investors still harboured doubts about how effective
the measure would be at bringing an end to the crisis.
"Considering the depth of the problems, the bias is likely
to continue to be toward avoiding risk," said a trader for a
Japanese trust bank.
With the dollar and the euro both lacking appeal at this
point, the yen is likely to benefit, he said. The euro's drop
against the yen could gain steam if the single European currency
were to break below 147 yen to what would be its lowest levels
in more than two years, the trader said.
While the dollar has surged this week, data has painted a
grim picture of the U.S. economy's health that could prompt the
Federal Reserve to mull cutting interest rates further from 2
percent.
Auto sales plunged 26 percent in September as consumer
confidence slid and financing has become more difficult to
obtain, while manufacturing activity shrank at the fastest pace
since the 2001 recession. []
But since the European Central Bank has yet to cut interest
rates, investors believe it may have more room to do so than the
Fed and thereby erode the euro's yield advantage over the
dollar.
The ECB wraps up a policy meeting later in the day and is
widely expected to keep rates on hold at 4.25 percent.
[]
(Additional reporting by Masayuki Kitano and Kevin Yao in
Singapore; Editing by Michael Watson)
