* Dollar up on report U.S. considers Fannie, Freddie takeover
* Euro near record high vs yen on yield advantage
* Friday's U.S. data seen fuelling stagflation fears
By Eric Burroughs
TOKYO, July 11 (Reuters) - The dollar edged up against the
yen on Friday after a report the U.S. government is considering
taking over Fannie Mae and Freddie Mac if their condition
worsens, providing some relief to investors and boosting stocks.
The Bush administration is mulling a plan to take over one or
both of the companies and place them in conservatorship, leaving
shareholders with almost nothing while guaranteeing the mortgages
that Fannie and Freddie own, the New York Times reported
[]
The dollar has slid along with equity markets all week as
investors have fretted about the sell-off in the shares and bonds
of Fannie and Freddie, which highlighted the still fragile state
of U.S. financial markets nearly one year after the subprime
crisis began.
Analysts said the report was by no means a clear-cut positive
for the dollar.
"The newspaper report is a dollar-selling incentive as it
prompts investors to think the financial sector woes are bad
enough to make the U.S. authorities consider such a step," said
Hideki Hayashi, chief economist at Shinko Securities.
"If the situation is that serious, the U.S. stock market is
likely to fall further on risk aversion and on concerns of a
massive new share issue to capitalise the mortgage firms. The
expected volatility in the stock market should result in a weaker
dollar."
Asian stock markets rebounded from early losses on the
report, with the Nikkei share average <> rising 0.4 percent.
Japanese government bonds and U.S. Treasuries fell. []
The euro stayed within sight of a record high against the
low-yielding yen on expectations that the European Central Bank
is more likely to raise interest rates to fight inflation than to
cut them later in the year.
ECB President Jean-Claude Trichet said on Thursday that euro
zone inflation, which is running at a record 4 percent, will
remain above the central bank's desired level for longer than
first expected. The ECB targets inflation of just below 2 percent
in the medium term. []
"The dollar remains on a downward trend, while the euro is on
an upward trend. That hasn't changed," said Tsutomu Soma, senior
manager of foreign assets at Okasan Securities.
"The dollar is vulnerable due to its yield disadvantage
compared to higher-yielding currencies. Expectations that the Fed
may not be able to raise interest rates will strengthen if
concerns over the financial sector linger," Soma said.
The euro was little changed from late U.S. trade on Thursday
at $1.5784 <EUR=>, back near the top end of the range between
$1.5300 and $1.5910 that it has been trapped in for the past two
months.
A break above $1.5910 would allow the euro to test the record
peak of $1.6020 hit in April.
Analysts said important economic events next week, including
semiannual monetary policy testimony by Federal Reserve Chairman
Ben Bernanke and a batch of U.S. data, could help the euro break
above the range towards that record peak.
The euro gained 0.2 percent to 169.22 yen <EURJPY=R>, not far
from an all-time high of 169.47 hit on trading platform EBS late
last month.
The dollar rose 0.1 percent from U.S. trade to 107.20 <JPY=>.
Even as stocks have slid, the dollar and other currencies
have been underpinned against the yen by solid demand for
overseas assets from Japanese investors in quest of higher
returns.
Nippon Life Insurance, which manages 46 trillion yen ($429.5
billion) in assets, told Reuters on Thursday it kept its unhedged
foreign bond holdings steady in April-June but could boost its
investment if the dollar weakens. []
For over a year, the Bank of Japan has been leaving its
benchmark interest rates at 0.5 percent, the lowest among
industrial nations. The BOJ is expected to keep rates on hold for
a while as steep energy and commodity prices sap the economy.
Investors were reluctant to pick up the dollar ahead of
earnings reports from leading financial firms such as Citigroup
Inc <C.N> and Merrill Lynch <MER.N> next week. Traders say more
bad news from financial institutions could spark further dollar
selling.
In addition to financial sector concerns, worries that record
high oil is taking a toll on U.S. consumption while fuelling
inflation add to gloom for the dollar.
Investors will look to the Reuters/University of Michigan's
gauge on consumer sentiment for July and the Labor Department's
import-export prices for June later in the day.
($1=107.09 yen)
(Additional reporting by Rika Otsuka, Editing by Brent
Kininmont)
