Chandler: Fed Facilities Cut Dollar Recovery Short

The dollar was continuing to recover from yesterday's slide until details of the Fed's new facilities cut it short.

The Fed announced two new programs. First, it will purchase up to $600 billion of agency debt backed by US government housing finance. Second it will set up a $200 billion facility to support consumer and small business loans.

Under the first program, the Fed will purchase $100 billion of debt directly from Fannie Mae and Freddie Mac and the Federal Home Loan Banks. It will buy up to $500 billion of bonds backed by Fannie, Freddie and Ginnie Mae.

Under the second program the Fed will offer up to $200 billion as back-up facility for investors in new AA asset backed securties—with the idea being that these ABS will backed by new loans for education, auto, credit cards, and Small Business Administration loans.

The Treasury Department will provide $20 billion from TARP apparently for the first program.

The purchases of bonds from Fannie and Freddie may help mitigate some of the negative impact of the competition soon to hit them from the FDIC explicit guarantee for new bank bonds.

The Fed says its goal is to "reduce the cost and increase the availability of credit" to purchase homes and help improve the capital markets.

The announcement corresponded with a new pressure on the US dollar and a rebound in the equity trading. The logic appears to be that these steps, along with the others, that have been taken, along side the large fiscal stimulus package that is being bandied about, gives greater optimism that the financial crisis is easing. The urgency to de-leverage may be easing.

Support in the euro is seen near $1.2800 and the real test for the euro is whether it can surmount the $1.30 level. Sterling briefly dipped below $1.50 before rebounding. It chief nearby hurdle is $1.52. Look for the dollar to test the JPY97.00.

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Marc Chandler is the global head of currency strategy for Brown Brothers Harriman. He has been analyzing, writing and talking about the foreign exchange market for more than 20 years. He is a regular guest on CNBC and his essays have been published in numerous economic and business publications. He previously served as the chief currency strategist for HSBC Bank USA and Mellon Bank.