Eric Burroughs / Reuters | Monday, July 14, 2008
The dollar inched up from near a record low against the euro on Monday after the U.S. Treasury and Federal Reserve launched emergency measures to restore investor confidence in embattled U.S. mortgage lenders Fannie Mae and Freddie Mac. The Treasury boosted its direct credit lines to the companies that fund half of all U.S. mortgages and said it would buy their shares if necessary, while the Fed said its direct lending window to financial firms was available to them.
Both Fannie, Freddie and their regulator repeated that they had adequate capital and plenty of access to liquidity in what has become the latest chapter in the year-old credit crisis spawned by swelling defaults on U.S. subprime mortgages.
Highlighting the ongoing housing debacle in the United States, federal regulators seized mortgage lender IndyMac Bancorp in the third largest bank failure in the country’s history.
The doubts about the health and capital strength of the mortgage financing giants have spooked dollar-holders since their about $5 trillion of bonds are held by so many investors around the world, especially central banks in Asia.
Reports last week raised the prospect of the U.S. government nationalising Fannie and Freddie if their financial condition worsened.
Treasury Secretary Henry Paulson noted in a statement that the bonds of Fannie and Freddie were held “around the world,” an acknowledgment to some analysts of the important role their massive debt plays for the dollar.
“At the end of the day, the holders of agency debt are significantly in overseas hands and foreign central banks. They had to do this because confidence could weaken further, and that would be very, very bad for the dollar,” said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.
“There’s still going to be a lot of concern about the dollar,” Selvanathan said.
Russia’s central bank said over the weekend it was happy with its holdings of roughly $100 billion of agency bonds, but other central banks stayed mum.
As of mid-2007, China and Japan were the biggest long-term agency bondholders at $376 billion and $228 billion respectively, according to U.S. Treasury data.
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