* Freddie Mac, Fannie Mae rescue measures boost sentiment
* Concerns about health of U.S. financial sector remain
* Bernanke testimony eyed
(Recasts, updates prices, changes byline, changes dateline,
previous LONDON)
NEW YORK, July 14 (Reuters) - The dollar rallied from a
near-record low against the euro on Monday after the United
States announced an emergency plan to restore investor
confidence in mortgage finance companies Fannie Mae and Freddie
Mac.
The Treasury boosted its direct credit lines to the
government-sponsored enterprises and said it would buy their
shares if necessary, while the Federal Reserve made its direct
lending window to financial firms available to them. For
details, see [].
The plan helped calm market concerns about the health of
the U.S. financial and housing sectors, as the two companies
fund half of all U.S. mortgages. Analysts urged caution, noting
its potential expense.
"The US dollar has begun the week off on a firm note, aided
by position adjusting in the wake of the U.S. government
initiative to shore up support for Fannie Mae and Freddie Mac,"
said Brown Brothers Harriman in a research note to clients.
"The dollar's gains are broad based, but simply recoup part of
the pre-weekend losses."
Underlining the tensions in the sector, federal regulators
seized mortgage lender IndyMac Bancorp <IMB.N> on Friday, one
of the largest banks to fail in U.S. history.
"Given intensifying concerns over bank failures following
the government's seizure last week of IndyMac Bank, it is
difficult to get very excited over today's dollar rebound,"
said Stephen Malyon, senior currency strategist at Scotia
Capital in Toronto in a research note to clients.
In early New York trade, the euro was down 0.5 percent on
the day at $1.5858, having earlier come within half a cent of
April's record high <EUR=>.
The dollar index <.DXY>, which tracks its progress against
a basket of six major currencies, added 0.5 percent to 72.176
bouncing off a 2-1/2 month low set before the U.S.
announcement.
The greenback was also up 0.4 percent at 106.64 yen
<JPY=>.
Analysts said the dollar's recovery would depend on whether
the U.S. initiatives were enough to calm investors' concerns
about the financial health of Fannie and Freddie. Any
improvement in their credit spreads and shares may help the
dollar rebound further.
Russia's central bank said over the weekend it was happy
with its holdings of roughly $100 billion of agency bonds,
which includes Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, but
other central banks were silent. [].
As of mid-2007, China and Japan were the biggest long-term
investors in agency bonds at $376 billion and around $228
billion respectively, according to U.S. Treasury data.
BERNANKE EYED
Investors will also be watching to see how the latest
developments affect Fed Chairman Ben Bernanke's views on
monetary policy and the economic outlook.
Bernanke will testify before the Senate Banking Committee
on Tuesday and the House of Representatives' Committee on
Financial Services on Wednesday.
"The (GSE rescue plan) news does nothing to calm fears on
the extent of the unfolding economic slowdown and will raise
speculation Bernanke will be unable to toe the hawkish line he
might have wished to in this week's key semi-annual testimony,"
said Commerzbank Corporates & Markets.
Money markets have scaled back their expectations for
monetary tightening from the Federal Reserve and now don't
expect it to start hiking until the final months of the year.
That is potentially bearish for the dollar given the
European Central Bank's rate rise to 4.25 percent this month.
(Additonal reporting by Veronica Brown and Toni Vorobyova in
London)
(Reporting by Nick Olivari; Editing by Tom Hals)
