* Fannie and Freddie rescue plan eases worst credit fears
* Relief rally in dollar drags down oil
* Relief may give way to fears about U.S. financial
stability
(Updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, July 14 (Reuters) - The U.S. dollar rose and
government bonds slipped on Monday after Washington gave its
backing to troubled mortgage firms Fannie Mae and Freddie Mac,
but shares dropped on concern the global credit crisis is worse
than previously thought.
Shares in global banking giant HSBC Holdings
<0005.HK><HSBA.L> fell 2.2 percent, and shares of Mitsubishi
UFJ Financial Group <8306.T>, Japan's biggest bank, as
investors took the bailout as a sign the financial sector is in
greater trouble than first thought because of the year-old
credit crisis.
European shares were expected to open as much as 1.1
percent higher, according to financial bookmakers.
The U.S. plan was an attempt to reassure investors after
Fannie Mae <FNM.N> and Freddie Mac <FRE.N> stock plummeted more
than 40 percent last week on spiralling fears 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 <> finished 0.2 percent
lower, led by Softbank Corp <9984.T>, which owns 41 percent of
Yahoo Japan. Yahoo Inc <YHOO.O> rejected a takeover proposal
from Microsoft Corp <MSFT.O> and investor Carl Icahn.
Shares in Asia-Pacific companies outside of Japan fell 1.1
percent on the day, according to an MSCI index <.MIAPJ0000PUS>.
Hong Kong's Hang Seng index <> fell 1.3 percent, with
shares of HSBC <0005.HK><HSBA.L> and Industrial & Commercial
Bank of China, the country's largest lender, among the biggest
drags.
SAFETY FIRST
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.
As part of the plan, the Federal Reserve offered Fannie and
Freddie access to emergency cash through its discount window.
The U.S. Treasury wanted to expand its line of credit to the
two U.S. mortgage firms and said it would buy equity in them if
needed. []
The U.S. dollar enjoyed a relief rally, 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 0.5 percent to $1.5879 <EUR=> and the dollar
rose 0.4 percent to 106.55 yen <JPY=>.
The recovering U.S. dollar knocked oil prices, which
slipped 0.4 percent to $144.52 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 the government-sponsored entities and load up its
balance sheet with their debt.
"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.
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, as bond investors ventured back into buying debt issued
by Fannie and Freddie.
Japanese government bond futures fought back to positive as
the Nikkei declined on the day.
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, 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)
