The US dollar fell against the euro but climbed on a sliding yen on Monday after the US government seized control of mortgage companies Fannie Mae and Freddie Mac to shore up the US housing market and protect against more global financial turbulence.
The yen was the major loser as the move seemed to lessen one major risk to global financial markets and the US economy, reversing last weeks' broad surge on a flight to safety.
The takeover on Sunday of the two mortgage giants, which own or guarantee half of the country's $US12 trillion in outstanding home mortgage debt, followed growing concern about the mounting losses at both of them, undermining them as other sources of house lending have dried up.
Still, the impact of the rescue package on the US economy may be limited and the outlook for the US dollar is unclear after data on Friday showed a jump in the unemployment rate as the economy lost jobs for the eight month in a row, analysts said.
"It's not as if there are hopes for the economy to improve just because of this (rescue package),'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America.
The euro rose 0.9% to $US1.4402, off an 11-month low of $US1.4197 touched last week.
The dollar index, which tracks the value of the greenback against a basket of six currencies, slipped 0.2% at 78.345.
"Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' US Treasury Secretary Henry Paulson said at a news conference.
Paulson also said Fannie Mae and Freddie Mac were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe''.
A large proportion of their bonds are held by many investors around the world, especially central banks in Asia.
Yen gets hit
The yen had shot higher and hit a two-year high against the New Zealand dollar and a near five-year high versus sterling last week as intensifying risk aversion led investors to dump leveraged carry trades funded in the Japanese currency.
Now some of that process is reversing, knocking the yen broadly lower while boosting the euro and commodity currencies like the Australian dollar.
"The news was seen as supportive for the US financial sector and this triggered widespread buying back of short yen cross positions,'' said Bank of New Zealand currency strategist Danica Hampton.
Japanese Finance Minister Bunmei Ibuki said on Monday the US move would be positive for the global economy. Ibuki also said Paulson would explain the mortgage lenders rescue package to the G7 finance ministers later Monday.
The euro jumped to 155.92 yen, up 1.4% from late in New York on Friday and shot as high as 156.93 yen on trading platform EBS in early Asian trade.
The US dollar climbed 0.6% to 108.35 yen and touched as high as 109.05 on EBS, while the Australian dollar jumped 2.3% to 89.95 yen, sharply above a two-year low of 84.98 yen hit last week.
The high yielding New Zealand and Australian currencies recouped some of their recent sharp losses as risk aversion calmed a little.
The kiwi jumped 2% to $US0.6816 and the Aussie gained 1.8% to $US0.8308.
Reuters
