The dollar took a beating Monday, suffering its worst single-day decline ever against the euro, as concerns grew that a 700-billion-dollar rescue plan for the banking system will further burden US finances. Dealers said that after the euphoria Friday on the markets when news of the bailout plan began to circulate, investors on Monday had grown more wary, especially as to who would pay the final bill and what it could mean for US government debt levels.
The euro jumped to 1.4796 dollars from 1.4476 dollars in New York late on Friday. At one point, the single currency swung as high as 1.4866 dollars, its highest level since August 22 and biggest one-day move since the euro's creation in 1999. The dollar fell to 105.42 yen from 107.38 yen. As the "mother of all bailouts" was debated in Congress, analysts said it was unclear if the measure would pass in its current form. And even if it did, the impact on the financial crisis and economy might not be as great as anticipated, some said.
"Uncertainties regarding the outcome of the Treasury's rescue plan for the US financial markets have clearly pressed on the greenback as market participants weigh the repercussion effects of the bailout proposed last week," said David Sing at Forex Capital Management.
"If Congress decides to ratify the new initiatives this week, the move could spark bullish sentiment for the US dollar. However, if Congress fails to act before they break at the end of this month, mounting selling pressures could lead the greenback to weaken significantly going forward."
But even if approved, the US government rescue "measures will lead to a significant deterioration of the fiscal position of the US relative to other economies and should be negative for the dollar as well," Barclays Capital analyst David Woo said.
"The market doesn't know what to make of the plan as it remains murky and it will take time to see the effects of the plan," added Saburo Matsumoto, chief foreign exchange strategist at Sumitomo Trust Bank. The US government sharply increased its permitted debt level to allow for the bailout and this has raised concerns that Washington will be looking to foreign investors to provide some of the financing by buying more US dollar instruments such as bonds.
Dealers said that some sections of the market were worried that financing the bailout may prove more difficult than expected and put pressure on the dollar, which might force the US Federal Reserve to consider a rate hike to bolster the currency's attractiveness.
That would not sit well with expectations that US interest rates will be cut significantly to help the economy weather the financial turmoil. US President George W. Bush and US Treasury Secretary Henry Paulson, who unveiled the scheme over the weekend, want Congress to pass it quickly but there are some who have balked at the idea of giving the administration carte blanche. In late New York trade, the dollar stood at 1.0730 Swiss francs from 1.1043. The pound was at 1.8568 dollars after 1.8305.
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