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Dollar Weakens as Credit Worries Linger

The U.S. dollar fell against a basket of currencies on Thursday, weighed down by renewed credit worries after shares in major mortgage finance sources Fannie Mae and Freddie Mac tumbled on capital concerns.

Stress in financial markets intensified after Fannie Mae and Freddie Mac stocks plunged to their lowest since 1991.

The yield spread premium for the larger Fannie Mae rose to its highest since before the Federal Reserve's bail-out of U.S. investment bank Bear Stearns Cos in March.

"This is all Fannie and Freddie, renewed credit concerns overall, and general risk aversion that we have been seeing for the week," said Ron Simpson, director of currency strategy at Action Economics in Tampa, Florida.

"We saw dollar/yen sold down to below 107. Everybody is still nervous," he added.

In late morning trading, the dollar index, tracking the greenback's performance against six major currencies, fell.

The euro rose versus the dollar, touching a one-week high at $1.5800, according to Reuters Dealing.

The dollar was slightly down against the Swiss franc . The Swiss franc also gained versus sterling, and rose against the yen .

Against the yen, the dollar trimmed gains, off session highs at 107.43 .

Worries over Fannie Mae and Freddie Mac were heightened after Bloomberg News quoted former St.

Louis Federal Reserve President William Poole as saying both shareholder-owned but government-sponsored agencies are "insolvent."

Bernanke, Paulson Comments

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole was quoted as saying in an interview held on Wednesday.

Freddie Mac, however, rejected speculation it may need to raise more funds, saying on Thursday that the second largest source of U.S. home funding has "absolutely" enough capital.

That helped stabilize the market a bit, along with comments from both Fed Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson, who said monetary authorities are committed to restoring the financial system.

"The U.S. dollar looks to have survived the latest test, with euro/dollar failing at $1.5800," said a trader at Forex.com in Bedminster, New Jersey.

"But upside potential remains while the pair is above $1.5760 and below there, the short-term buyers will bail out. Dollar/yen and other yen crosses also look resilient, which is slightly nuts when you consider what's going on in financial shares," he added.

Earlier, news of a decline in U.S. weekly jobless claims gave the dollar a fleeting boost, although analysts say data on continuing claims reflect the ongoing deterioration in labor market conditions.

Crude oil prices stayed about less than $10 below a recent record high despite inventories falling heavily and renewed geopolitical tensions.

That has generally supported the dollar earlier in the session, although U.S. crude futures last traded at $137.65 a barrel, up more than 1 percent on the day.

In other currencies, sterling struggled against the dollar and euro after the Bank of England held interest rates steady at 5.0 percent on Thursday, but analysts say rates will have to fall, making the pound less attractive.

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