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Dollar Up vs. Yen on Buffett Rescue Plan

Reuters
Tuesday, 12 Feb 2008 | 1:19 PM ET

The dollar fell against the euro Tuesday but gained on the yen after Warren Buffett said he had offered to assume troubled bond insurers' liabilities, a move that may ease recent credit market turmoil.

U.S. equities rallied after Buffett told CNBC television that the Berkshire Hathaway plan would cover $800 billion in municipal bonds. That helped lift the dollar against the low-yielding yen, which tends to rise with risk aversion but
suffers when investor outlook brightens.

But a renewed risk appetite also boosted the euro against the yen and pushed the European currency to a session peak of $1.4614 before easing to $1.4598, up about 0.5 percent from late Monday.

"It seems risk appetite is returning, though not really to the dollar's favor," said Amo Sahota, senior currency strategist at HiFX, an online FX firm in San Francisco. "It will be interesting to see how equities play out today in
response to the Buffett news, as I'm not sure it's enough to turn markets around."

Bond insurers guarantee more than $2.4 trillion of debt and have been struggling to hold on to their top credit ratings after suffering heavy losses from backing mortgage securities that have plunged in value.

Markets worry that downgrades would rattle credit markets further and set off more large write-downs on Wall Street.

The dollar hit a session peak of 107.53 yen before easing slightly, but still up on the day. The euro also rose versus the Japanese currency .

Sterling climbed, shaking off earlier losses suffered after a tame British inflation report boosted expectations of more Bank of England rate cuts ahead.

Analysts, though, said Buffett's offer to bond insurers did not signal the end of market turmoil, and many added that it does little to address underlying credit problems.

"It's pretty much like putting a band-aid on a big wound," Sahota said. "The Federal Reserve's proactive and aggressive easing has been more helpful to the market so far."

The Fed has slashed benchmark interest rates from 5.25 percent to 3 percent since mid-September, with 1.25 percantage points alone coming during an eight-day span in January.

And the U.S. economy's woes may not be over yet.

Goldman Sachs said on Tuesday that the euro's dip toward the bottom of the $1.43-$1.50 range that's prevailed since November was a good buying opportunity, noting that more negative U.S. economic news could push it to a new record high above $1.50.

To that end, Wednesday's U.S. retail sales report for January will be watched for clues about the health of the American consumer, who accounts for two-thirds of U.S. growth.

A Reuters survey of economists expects to see a 0.2 percent decline, and a bigger slide would like add to dollar pressure.

But some said the euro would have a hard time extending gains much further amid growing expectations that the European Central Bank's next interest rate move will be a cut.

The ECB has held rates at 4 percent since the credit crisis erupted last summer even as the U.S., British and Canadian central banks reduced their benchmark borrowing costs.

And last week, ECB President Jean-Claude Trichet said the euro-zone economy was facing downside growth risks.

While a gauge of German business sentiment on Tuesday beat expectations, the euro didn't get much traction until Buffett revealed his bond insurer plan during early New York trade.

"The ECB really did subtly change its tone last week and they are in the process of turning the ship, if you will," said Sophia Drossos, senior FX strategist at Morgan Stanley in New York. "It will take some time -- our sense is they won't be in a position to cut until April at the earliest -- but there's no more talk of their raising rates."

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