* Fannie and Freddie rescue plan eases worst credit fears
* Relief rally in dollar knocks oil lower
* Relief may give way to fears about U.S. financial
stability
(Updates prices, adds comment)
By Kevin Plumberg
HONG KONG, July 14 (Reuters) - The U.S. dollar rose and
government bond prices fell on Monday after Washington proposed
an emergency plan to rescue the top U.S. mortgage finance
companies, offering to buy their shares if necessary.
Asian stock markets largely fell, althouh shares in China
and Japan rose, as some investors took the bailout as a sign
that the financial sector is in greater trouble than first
thought as the U.S. subprime crisis plays out.
The U.S. plan was an attempt to reassure investors after
Fannie Mae <FNM.N> and Freddie Mac <FRE.N> stock both plummeted
more than 40 percent last week on spiralling fears that both
companies, which are pillars of the housing market, were under
capitalised and the credit crisis toppled a fifth U.S. bank.
[]
Both companies, which are shareholder-owned but also
government-sponsored, said they are adequately capitalized, but
welcomed the measures and said they would help confidence.
"Steps to shore them up is a positive but the fact that
they are having difficulties in the first place is just
symptomatic of a difficult environment out there. And that
makes it hard to get too positive," said Greg Goodsell, equity
strategist with ABN AMRO in Sydney.
Japan's Nikkei share average <> rose 0.5 percent, led
by semiconductor equipment maker Tokyo Electron Ltd <8035.T>.
Shares in Asia-Pacific companies outside of Japan fell 0.7
percent on the day, according to an MSCI index <.MIAPJ0000PUS>.
Hong Kong's Hang Seng index <> fell 0.9 percent, with
shares of HSBC <0005.HK><HSBA.L> and Industrial & Commercial
Bank of China, the country's largest lender, among the biggest
drags.
South Korea's KOSPI index <> was largely unchanged.
SAFETY ABOVE ALL ELSE
The timing of the U.S. government's plan was critical,
ahead of a crucial debt issue by Freddie Mac on Monday and
after U.S. bank regulators on Friday seized mortgage lender
IndyMac Bancorp <IMB.N> in the third-largest bank failure in
U.S. history.
Results from major financial institutions this week,
including JPMorgan Chase & Co <JPM.N>, Merrill Lynch & Co Inc
<MER.N> and Bank of America Corp <BAC.N>, should offer some
indication whether or not fallout from credit stress is
worsening.
The U.S. dollar enjoyed a relief rally on the Fannie and
Freddie bailout plan, after slipping 0.8 percent against a
basket of major currencies last week on concerns about the
stability of the U.S. financial system.
The euro fell 0.3 percent to $1.5906 <EUR=> and the dollar
rose 0.3 percent to 106.45 yen <JPY=>.
The recovering U.S. dollar knocked oil prices, which
slipped 0.2 percent to $144.86 a barrel <CLc1>. However,
ongoing tension between the West and Iran, the world's fourth
largest crude exporter, provided a cushion [].
The longer-term outlook for the dollar was darker,
especially if the U.S. federal government is forced to
nationalise government-sponsored entities and load up its
balance sheet with their debt.
"The market will remain sceptical that the government won't
take full custodianship eventually. Such a development would
significantly increase public debt and would be detrimental to
U.S. credit ratings," said Ashley Davies, currency strategist
with UBS in Singapore.
"The uncertainty will likely deter foreign reserve managers
from acquiring additional U.S. Treasury and agency debt and
keep the dollar on the back foot for now," he said in a note.
Japanese government bond futures fell in tandem with U.S.
Treasuries as investors eased back on their holdings of
safe-haven debt in reaction to the Fannie and Freddie news.
September JGB futures fell by 0.08 point to 135.91 <2JGBv1>
though remained near a two-month high reached on Friday.
The benchmark 10-year U.S. Treasury yield <US10YT=RR>,
which moves in the opposite direction to price, rose to 4.00
percent, up about four basis points from late Friday in New
York.
Investors have been committed to a safety-first style of
investing lately because of the bear market in global equity
markets, high inflation in almost every region of the world and
sluggish growth rates. As a result, money market funds have
ballooned this year, taking in $27 billion in new money so far
this year, according to Boston-Based EPFR Global, which tracks
$10 trillion in assets.
"While some of the inflows to Money Market Funds can be
attributed to investors returning cash deployed to take
advantage of the arbitrage opportunities at the end of the
second quarter, some of it is just good, old fashioned flight
to safety," said EPFR Global Managing Director Brad Durham in a
note.
(Additional reporting by Geraldine Chua in Sydney; Editing by
Louise Heavens)
