Forex - US dollar rebounds vs euro, yen on hopes for Ambac bailout

Forbes Magazine (25 February 2008)

HONG KONG (Thomson Financial) - The US dollar rebounded against the euro and yen in afternoon trading in Asia on Monday, buoyed

by speculation of a rescue plan for troubled bond insurer Ambac Financial Group

Ambac risked losing its AAA credit rating due to losses on securities linked to unpaid housing mortgages. The insurer may announce this week a rescue package that includes a fresh capital infusion arranged by a group of lenders.

'The dollar got some boost from the report late Friday about the rescue package for Ambac. It's one less thing to be nervous about and provides a relief for the troubled credit market,' said David Cohen, director of Asian economic forecasting at Action Economics.

At 1.00 pm (0500 GMT), the euro was down at 1.4812 dollars from 1.4834 dollars in Sydney this morning. One dollar was buying 107.38 yen, up from 107.20 yen.

'The dollar's strength is a late reaction on Ambac,' said Tim Condon, research head at ING Financial Markets. 'It's also a reflection of the growing risk appetite of investors.'

Investors were encouraged to borrow from Japan, where the 0.5 percent benchmark rate is the lowest among developed countries, and invest the proceeds in higher-yielding securities including stocks elsewhere, weakening the yen.

Asian stock markets including Japan, Hong Kong and South Korea were mostly higher this

morning, tracking gains on Wall Street Friday.

Over the next few weeks, the dollar will continue to remain under pressure on speculation that

the Federal Reserve will further trim its key interest rates while the European Central Bank is likely to keep rates unchanged in the first half of 2008.

'The pressure on the dollar will not go away. There are views that the US is on the brink of a recession. But we have yet to get a confirmation on that,' said Action Economics' Cohen.

The Fed may cut rates by 50 basis points when policy makers meet on March 18, Cohen said. The Fed has slashed rates by a cumulative 225 basis points since September.

In the meantime, the market will be keeping an eye on US economic data releases that this week include last month's consumer spending and home sales, both new and existing.

The Fed last week cut its 2008 growth forecast for the US economy to 1.3-2.0 percent from as much as 2.5 percent, while raising its inflation estimates.

The ECB followed the Fed in reducing its growth estimate and raising its inflation expectations.

Inflation in the 15-member euro zone area may rise to an average of 2.6 percent this year from a previous estimate of 2.1 percent, raising speculation that the ECB won't cut rates soon to boost the region's economy.