Buffett bailout plan knocks dollar versus euro
NEW YORK (Reuters) - The dollar fell against the euro on Tuesday but rose versus the yen after billionaire investor Warren Buffett offered to assume troubled bond insurers' liabilities, encouraging investors to buy risky assets.
Buffett told CNBC television that the plan by his Berkshire Hathaway (BRKa.N) company would cover $800 billion in municipal bonds, a step that might help to ease recent credit market turmoil.
The news reignited risk appetite, boosting the euro against the dollar and the low-yielding Japanese yen and Swiss franc, but gains were capped by worries that Buffett's bailout plan on its own was insufficient to turn around sentiment.
"It injected a positive tone in the market and investors are willing to take risk. But it's not nearly enough to address the deep underlying problems in the market," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "The gains are being capped both on the euro and equity side."
The euro raced to a session peak of $1.4614 before easing to $1.4589, up about 0.4 percent from late Monday. The improvement in risk appetite, evident in the stock market rally, lifted the dollar against the yen.
The dollar last traded up 0.5 percent at 107.46 yen, after scaling a session peak of 107.53 yen. The euro jumped 0.9 percent to 156.81 yen, but off an intraday high of 157.05 yen. It firmed 0.5 percent to 1.6088 Swiss francs.
Bond insurers guarantee more than $2.4 trillion of debt and have been struggling to hold on to their top credit ratings after suffering heavy losses from backing mortgage securities that have plunged in value.
Markets worry that downgrades would rattle credit markets further and set off more large write-downs on Wall Street.
Analysts, though, said Buffett's offer to bond insurers did not signal the end of market turmoil, and many said it does little to address underlying credit problems.
"As details become clear, I think the market will start reverting back to the recent pattern -- equity markets remaining under pressure, the dollar gaining some traction, and the yen and Swiss gaining some traction as well," said Paresh Upadhyaya, currency analyst at Putnam Investments in Boston.
Low-yielding currencies such as the yen and Swiss franc tend to attract flows during periods of uncertainty as their low interest rates reflect the capital surplus of their respective countries.
Sterling climbed 0.5 percent to $1.9610, shaking off earlier losses suffered after a tame British inflation report boosted expectations of more Bank of England rate cuts ahead.
While a gauge of German business sentiment on Tuesday beat expectations, the euro didn't get much traction until Buffett revealed his bond insurer plan during early New York trade.
Analysts reckon this will not change expectations that the European Central Bank will cut interest rates later this year to counter slowing economic growth.
"The ECB really did subtly change its tone last week and they are in the process of turning the ship, if you will," said Sophia Drossos, senior FX strategist at Morgan Stanley in New York. Continued...
