Dollar bounces off near-record low against euro

The dollar bounced off a near-record low against the euro yesterday after the United States unveiled an emergency plan to restore investor confidence in embattled mortgage lenders Fannie Mae and Freddie Mac.

The Treasury boosted its direct credit lines to the government-sponsored enterprises and said it would buy their shares if necessary, while the Federal Reserve made its direct lending window to financial firms available to them.

The plan went some way to calming market concerns about the health of the US financial and housing sectors, as the two companies fund half of all US mortgages. But analysts urged caution, noting the potential expense and the fact it was far from a cure-all.

"That is something that improves sentiment generally in the market, with risk appetite and so on, and it will also be positive for the dollar," said Johan Javeus, FX strategist at SEB Merchant Banking in Stockholm. "But we are still in a trend, which is quite dollar negative so it may be a temporary relief. The US problems are still of course there even if measures are being taken to alleviate the effects."

Illustrating ongoing tensions in the sector, federal regulators seized mortgage lender IndyMac Bancorp on Friday in the third largest bank failure in the country's history. By 07.23 GMT, the euro was down 0.45 per cent on the day at $1.5867, having earlier come within half a cent of April's record highs of $1.6018.

The dollar index, which tracks its progress against a basket of six major currencies, added 0.5 per cent to 72.172, bouncing off a two-and-a-half month low set before the US announcement. The greenback was also up 0.3 percent at 106.58 yen.

Analysts said the dollar's recovery would depend on whether the US initiatives were enough to assuage investors' concerns about the financial health of Fannie and Freddie.