* Dollar up, Treasury and Fed offer help to Fannie, Freddie

* Before announcements, dollar fell near record low vs euro

* Rebound in Fannie, Freddie stock and bonds may help dollar

The dollar inched up from near a record low against the euro on Monday after the U.S. Treasury and Federal Reserve launched emergency measures to restore investor confidence in embattled U.S. mortgage lenders Fannie Mae <FNM.N&gt; and Freddie Mac <FRE.N&gt;. The Treasury boosted its direct credit lines to the companies that fund half of all U.S. mortgages and said it would buy their shares if necessary, while the Fed said its direct lending window to financial firms was available to them. [ID:nN13387357]

Both Fannie, Freddie, and their regulator repeated that they had adequate capital and plenty of access to liquidity in what has become the latest chapter in the year-old credit crisis spawned by swelling defaults on U.S. subprime mortgages.

Highlighting the ongoing housing debacle in the United States, federal regulators seized mortgage lender IndyMac Bancorp in the third largest bank failured in the country’s history.

The doubts about the health and capital strength of the mortgage financing giants have spooked dollar-holders since their about $5 trillion of bonds are held by so many investors around the world, especially central banks in Asia.

Reports last week raised the prospect of the U.S. government nationalising Fannie and Freddie if their financial condition worsened.

Treasury Secretary Henry Paulson noted in a statement that the bonds of Fannie and Freddie were held “around the world,” an acknowledgment to some analysts of the important role their massive debt plays for the dollar.

“At the end of the day, the holders of agency debt are significantly in overseas hands and foreign central banks. They had to do this because confidence could weaken further, and that would be very, very bad for the dollar,” said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.

“There’s still going to be a lot of concern about the dollar,” Selvanathan said.

Russia’s central bank said over the weekend it was happy holdings its roughly $100 billion of agency bonds, but other central banks stayed mum. [ID:nL12524115]

As of mid-2007, China and Japan were the biggest long-term agency bondholders at $376 billion and $228 billion respectively, according to U.S. Treasury data.

Analysts said the dollar’s recovery would depend on whether the U.S. initiatives were enough to assuage investors’ concerns about the financial health of Fannie and Freddie. Any improvement in the credit spreads and shares of Fannie and Freddie may help the dollar rebound further. The euro dipped 0.2 percent from U.S. trade last week to $1.5910 <EUR=&gt; and pulled back from a three-month peak of $1.5972 struck before the Treasury and Fed announcements, not far from the record high of $1.6020 hit in April.

The dollar climbed 0.2 percent to 106.43 yen <JPY=&gt;, recovering from a low of 105.96 yen hit in early trade.

Traders said the dollar’s reaction in Asia was limited because investors wanted to take their cue from markets in London and New York later in the day.

NATIONALISTION ON THE TABLE

After the Fannie and Freddie’s shares and bonds had slid for much of last week on worries about the condition, reports that the Bush administration was mulling a take-over if their troubles deepened caught investors by surprise and help their debt rebound.

The possibility of a government take-over of the two big mortgage companies was still on the table, analysts said.

“This is one small step in the direction of nationalisation,” said Naomi Fink, Japan macro strategist at Bank of Tokyo-Mitsubishi UFJ.

Fink said a rebound in their bonds and shares may mean the troubles for Fannie and Freddie go no further, but if the companies find they need to rely on the Fed’s discount window for cash they nationalisation becomes a more serious possibility.

Stock markets in Asia took heart from the announcements, hoping for a resolution to the latest financial sector fears. Japan’s Nikkei average <.N225&gt; rose 1.1 percent.

The rise in equity markets helped to underpin higher-yielding currencies. The Australian dollar rose 0.3 percent to 103.04 yen <AUDJPY=R&gt; and was up 0.1 percent to $0.9682 <AUD=D4&gt;, near a 25-year? high of $0.9718 hit on Friday.

U.S. Treasuries extended their slide on worries about more debt supply to help Fannie and Freddie, while investors also shifted into agency bonds from Treasuries on the possibility of nationalisation. [MKTS/GLOB]

Source: http://www.afxnews.com

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