Monday, July 14, 2008

Uncertainty over U.S. Dollar Continues

The U.S. dollar hovered near a record low against the euro on Tuesday, not long after rising after the U.S. Treasury and Federal Reserve announced emergency plans to help shore up investor confidence in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

Some investors weren't convinced though, as Hiroshi Yoshida, a trader at Shinkin Central Bank said, "It's difficult to actively buy the dollar just because of government support measures, because there are other factors weighing on the dollar, such as worries over the health of financial institutions and rising oil prices.

"The key is his view on inflation. If the market perceives Bernanke to be cautious about raising interest rates, it may add more momentum to dollar selling against the euro."

After the FDIC seized IndyMac Bancorp - as investors swarmed the bank in a panic withdrawing funds on the bank run - stocks in the sector plunged, causing even more instability in relationship to confidence in the U.S. dollar.

As a result, the U.S. Treasury increased its direct credit lines to Fannie Mae and Freddie Mac, adding that they'll buy up shares in the companies if they need to.

Concerning the euro, traders think the euro could rise even higher against the U.S. dollar if the European Central Bank raises interest rates later in 2008.

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