The dollar was on a relatively firm footing in early European trade as the market's appetite for risk was lifted by the overnight news that US home loans giant Fannie Mae has asked the federal regulators to raise the limit on the amount of mortgage securities it is allowed to hold as investments. News of the request boosted the regulated company's stock 5.87 usd, or more than 10 pct, its biggest percentage gain in two decades, to 62.50 usd, and helped account for the late surge in US equity indices, primarily from financial stocks.
That in turn has helped the dollar steady as the US currency has suffered of late from mounting concerns about the US housing market. The company is asking for the cap on its holdings to be raised as a way to provide more cash for the stretched mortgage market. Falling home prices and a spike in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans.
Steve Pearson, currency strategist at HBOS, said Fannie Mae's move has helped lift risk appetite, and to some extent has helped re-establish the link between risk appetite and currencies.
However, he reckons the "remedial action" to add some liquidity to the mainstream mortgage market is unlikely to alter the landscape materially as the huge supply overhang will continue to weigh on house prices, thus dampening all elements of related activity and increasing the incentive for borrowers to default. "At any rate the real threat to risk assets is not the dislocation in credit markets but the housing-led downturn in the US and potentially global economy," he said.
In the short-term though, currency players will be keen to find out what the US Federal Reserve thinks about developments in the US mortgage market, which has raised fears of a potential credit crunch.
Though the Fed is expected to keep its benchmark rate unchanged this evening at 5.25 pct, most attention will focus on the accompanying statement.