* Dollar falls broadly as Lehman shares sink
* Dollar upward momentum still intact
* Impact of GSE bailout on U.S. budget deficit in focus
(Recasts, updates prices)
By Lucia Mutikani
NEW YORK, Sept 9 (Reuters) - The U.S. dollar fell on
Tuesday as Lehman Brothers shares plunged on worries over the
investment bank's ability to raise capital, shifting the
spotlight back on the country's fragile financial sector.
The drop in Lehman <LEH.N> shares to their lowest level in
nearly a decade sapped the market's euphoria from the
government's weekend bailout of mortgage finance firms Freddie
Mac <FRE.N> and Fannie Mae <FNM.N.
That caused investors to dump riskier assets such as stocks
and the dollar in favor of the safe-haven Japanese yen and
Swiss franc.
"There are some rumors in the market place regarding the
well-being of Lehman Brothers," said Gareth Sylvester, currency
strategist at HiFX in San Francisco.
"Whenever we see heightened uncertainty with any large
institution, risk aversion moves higher and traders just want
to get out of riskier asset classes. We are seeing people
getting out of risky trades and into some safer currencies."
Analysts said there were fears that Lehman, the country's
fourth largest investment bank, could follow the same route as
Bear Stearns, whose takeover was engineered by the Treasury and
the Federal Reserve in March. Lehman declined to comment on its
plunging share price.
The dollar dropped to a session low against the yen of
107.07 yen <JPY=>. It was last trading at 107.19, down 1.1
percent on the day. The dollar fell 0.7 percent to 1.1236 Swiss
franc <CHF=>.
The euro reversed earlier losses against the dollar, also
supported by a report showing that U.S. pending home sales fell
more than expected in July. It was last trading 0.4 percent
higher at $1.4187 <EUR=>, backing away from an 11-month low
touched overnight.
BAILOUT EUPHORIA EBBING
Analysts said the markets were also starting to focus on
the impact of the Fannie Mae and Freddie Mac bailout on the
national budget deficit.
"I am not surprised to see dollar/yen lower on slightly
more risk averse markets," said Dustin Reid, foreign exchange
strategist at ABN Amro Bank in Chicago.
"The market is probably taking back a little bit of the
euphoria that we initially had and was dollar positive, given
the taxpayer implication and the impact of the debts."
A drop in the price of oil to a five-month low did little
to boost the mood on the markets, with shares on Wall Street
falling. U.S. crude <CLc1> traded down $2.44 at $103.88 per
barrel after falling as low as $103.46 a barrel earlier.
The ICE Futures U.S. dollar was down 0.5 percent at 79.158
<.DXY>. The index, which measures the dollar's value against a
basket of currencies, touched a year high the previous session.
Some profit-taking after Monday's hefty gains was also
behind the dollar's decline, analysts said.
"Given the dollar gains we have seen, it's just time for
some profit-taking. We have seen some cutting back on long
dollar positions," said Ronald Simpson, head of global currency
analysis at Action Economics in Tampa, Florida.
"The jury is still out a little bit with regard to the
bailout of Freddie and Fannie. For the most part, the markets
are taking it as a positive, but the dollar cannot rise in a
straight line. The uptrend is still intact."
The Treasury announced a conservatorship plan for Freddie
Mac <FRE.N> and Fannie Mae <FNM.N> on Sunday, sparking a dollar
rally on perceptions that the measures would restore confidence
in U.S. assets and help the housing market's recovery.
Sterling shrugged off a report showing that British
manufacturing output fell for a fifth straight month in July.
The pound was last up 0.5 percent at $1.7662 <GBP=>.
(Editing by Leslie Adler)
