The US dollar rallied to a one-year peak against a basket of currencies on Monday, as the government's take-over of the country's two biggest mortgage finance agencies boosted confidence in the US financial sector. The bailout of the beleaguered Freddie Mac and Fannie Mae, which own or guarantee half of the United States' $12 trillion in outstanding home mortgage debt, also prompted investors to wade back into risky trades, by buying higher-yielding currencies and selling the yen.
Overall, analysts viewed the US Treasury move as a positive step in staving off wider financial and housing market weakness. "The bailout package is going to help bring money and liquidity back to the US financial system," said Greg Salvaggio, a vice president for trading at Tempus Consulting in Washington, D.C. "Today's rally in the dollar is not so much the result of a bet in US economic fundamentals, but instead a bet liquidity and trading volumes will get back to normal."
"Having said that, I don't think the government action represents a silver bullet for all the problems facing the housing market and the economy. There are still so many questions about this bailout."
BUDGET IMPLICATIONS OF BAILOUT: But while the news did much to alleviate concern about systemic financial market risks, it did little to change fundamentals that had started to drive the dollar higher prior to the weekend - slowing growth in the euro zone and the UK.
Some analysts though have expressed reservations about the latest US government move and were not ruling out a correction in the dollar's bullish trend of the past month. Analysts at Wells Fargo said the potential costs to the taxpayer could be substantial and unwelcome in an economic slowdown where the US Treasury has limited scope for fiscal manoeuvre.
"We do believe...that the dollar's surge has gotten ahead of itself and, as significant as today's announcement is, it is not clear it will provide all the answers to the mortgage market's difficulties," Wells Fargo said in a research note.
"As initial euphoria gives way to measured sentiment, we still see potential for a sizeable dollar correction in coming weeks, with the euro gaining towards the high $1.40s." In the wake of the Fannie and Freddie take over, US Treasuries sank and US and European shares rallied.
Sterling reversed earlier gains versus the dollar after UK manufacturing output prices suggested factory gate inflation might have peaked. The pound slid to as much as $1.7472, a fresh two-year low. The dollar also gained 1.1 percent against the low-yielding Swiss franc to 1.1309 francs.