* Freddie Mac, Fannie Mae rescue lifts dollar vs euro
* Concerns about health of U.S. financial sector remain
* Market eyes upcoming Bernanke testimony to Congress
(Recasts, updates prices, adds quotes, byline)
By Steven C. Johnson
NEW YORK, July 14 (Reuters) - The dollar rose from a near
record low against the euro on Monday after the United States
announced an emergency plan to restore confidence in mortgage
finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
The U.S. Treasury boosted its direct credit lines to the
two shareholder-owned but government-sponsored enterprises and
said it would buy their shares if asked, while the Federal
Reserve made available its direct lending window to financial
firms. For details, see [].
The plan helped calm market concerns about the health of
the U.S. financial and housing sectors, since the two companies
fund half of all U.S. mortgages.
By late afternoon, though, the dollar had pared some of its
gains, with the euro rising back above $1.59, a cent or so from
its lifetime high.
"When Treasury came out with the plan and the Fed backed it
up, people were reassured and took the dollar higher," said
Mark Frey, head currency trader at Custom House, a global
payments dealer in Victoria, British Columbia.
"But on most trading desks, I think they've realized that
all we have here is a transfer of risk from the two enterprises
to the Treasury," he added. "That means a much larger deficit,
and it will likely lead to more dollar weakness."
Late in New York, the euro was down 0.2 percent at $1.5911
<EUR=> after slipping to $1.5842. The dollar fell 0.1 percent
to 106.10 yen <JPY=>, well off Monday's high of 106.81, while
sterling rose 0.2 percent to $1.9940 <GBP=>.
Billionaire investor George Soros told Reuters on Monday
that government debt accumulation coupled with a U.S. recession
leaves the dollar vulnerable. [].
Underlining these tensions, federal regulators seized
mortgage lender IndyMac Bancorp <IMB.N> on Friday, one of the
largest banks to fail in U.S. history.
Analysts said the dollar's recovery would depend on whether
the U.S. initiatives were enough to calm investors' concerns
about the financial health of Fannie Mae and Freddie Mac.
Russia's central bank said over the weekend it was happy
with its holdings of roughly $100 billion of agency bonds,
which includes Fannie Mae and Freddie Mac, but other central
banks were silent. [].
As of mid-2007, China and Japan were the biggest long-term
investors in agency bonds at $376 billion and around $228
billion respectively, according to U.S. Treasury data.
BERNANKE EYED
Investors will also be watching to see how the latest
developments affect Fed Chairman Ben Bernanke's views on
monetary policy and the economic outlook when he testifies
before the Senate Banking Committee on Tuesday.
Money markets have scaled back their expectations for
monetary policy tightening from the Fed and now don't expect it
to start hiking until the final months of the year.
"It seems self-evident that this is not a financial
environment that supports tighter Fed policy," said Alan
Ruskin, chief international strategist at RBS Greenwich Capital
in Greenwich, Connecticut.
"The one rate hike priced in for the end of January still
looks like one hike too many, and I can only see the Fed hiking
if inflation expectations hold a gun to its head, which is a
stagflation story that is hardly good news for the dollar."
That's not to say any of the other major currencies are
obvious buys, either, especially at current levels, said Custom
House's Frey.
"As a currency trader, I don't necessary want to go long
anything right now, other than commodities," he said. "I feel
safer doing that than buying the Australian dollar at a 26-year
high or the euro at $1.59, near an all-time high.
"We're getting to some pretty heady levels here, and
there's good reason to be concerned about the economies of
these other countries."
(Additional reporting by Nick Olivari; Editing by James
Dalgleish)
