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FOREX-Dollar rises, yen slides on Freddie, Fannie news

Reuters - 2 hours 47 minutes ago

* Dollar index rises, recovering from early slide

* Freddie, Fannie news boosts U.S. currency

* Yen slides broadly on warming risk demand

By Naomi Tajitsu

LONDON, Sept 8 - The dollar jumped against a broadly weaker yen and rebounded against a host of currencies on Monday after the U.S. government took control of Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.

Sunday's takeover of the battered mortgage giants, which own or guarantee half of the country's $12 trillion in outstanding home mortgage debt, was seen by some people as a positive step to stave off wider U.S. financial and housing market weakness.

It followed concern about growing losses at both, undermining the lenders as other sources of home lending have dried up.

The move was also taken as a signal to start piling back into risky carry trades, which saw the low-yielding yen sink broadly and high-yielding units such as the New Zealand and Australian dollars rally.

The dollar index <.DXY> rose 0.5 percent in European trade, recovering from an earlier slide as traders adjusted short positions in the U.S. currency, which initially fell broadly in a knee-jerk reaction to Sunday's news.

U.S. Treasuries fell sharply and European shares rallied roughly 4 percent on the news of the conservatorship, which some people believed may help to allay some of the market's worries about the global financial system and increase risk appetite.

As share markets cheered the news, analysts said that a warming in risk demand may continue to push the low-yielding yen down, helping to boost the dollar in the near term.

"A key will be whether the relief of this continues, and if it does, it could mean a weaker yen," said Steve Barrow, head of G10 currency research at Standard Bank.

Yet he added that uncertainty surrounding the plan and worries about the U.S. economy -- highlighted by a poor employment report late last week -- may prompt a correction in the U.S. currency's buying trend of the last month or so.

The euro was up 0.1 percent at $1.4280 <EUR=> by 0753 GMT but pulled back significantly from a session high of $1.4428. The pair hovered near an 11-month low hit late last week.

The euro and other currencies has been struggling against the dollar on the view that global economies are vulnerable to U.S. economic weakness.

YEN SUFFERS

The dollar <JPY=> rose 1.2 percent to 109.05 yen, with the Japanese currency also falling against higher-yielding currencies as traders returned to riskier trades, dumping the low-yielding currency for assets in higher-yielding ones.

This reversed the yen's gains made on broad flight-to-safety buying, pushing up the Australian <AUDJPY=R> and New Zealand <NZDJPY=R> dollars roughly 2 percent each.

Sterling briefly cut gains versus the dollar after UK manufacturing output prices suggested that factory gate inflation might have peaked. By 0938 GMT, the pound stood at $1.7718, up 0.3 percent on the day, having dipped briefly just after the data <GBP=>. The euro was flat at 80.63 pence <EURGBP=>.

Analysts said that the euphoria surrounding the news of the conservatorship could continue in the near term, but cautioned that the impact of the rescue package on the U.S. economy may be limited and the outlook for the dollar remains unclear.

Economic weakness was highlighted on Friday, when figures showed a jump in the unemployment rate as the economy lost jobs for the eighth month in a row.

"Whether the Treasury's move is sufficient to more lastingly break the negative dynamics in the financial markets remains to be seen," analysts at Danske said in a research note.

"Plenty of troubles are still out there and with U.S. house prices still falling, it is too early to make any firm conclusions on the lasting impact of this intervention," they said, adding that U.S. growth remains "very shaky".

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