May 6, 2008 / 1:08 PM / 12 years ago

Dollar falls on Fannie results

NEW YORK (Reuters) - The dollar extended declines against the euro and a basket of six major currencies for a second straight day on Tuesday after earnings results from Fannie Mae FNM.N came in weaker than expected.

Fannie Mae, the largest provider of U.S. home financing, reported its third straight quarterly loss as the U.S. housing crisis took another turn for the worse in the first quarter.

Problems at Fannie Mae remind investors that problems in America’s housing market, a major drag on the U.S. economy, may not yet have completely worked their way through the system — and bode ill for the dollar.

“(The Fannie Mae results) helps to remind us that ... we’re not out of the woods yet,” said Henry Wilkes, head of foreign exchange trading at Brown Brothers Harriman in London.

The euro traded 0.4 percent higher on the day at $1.5553, while the dollar index fell 0.4 percent to 72.920. The dollar also dropped 0.4 percent to 104.47 yen.

The dollar was already lower on earlier on Tuesday, pressured by waning risk appetite as European equities fell, while the single currency drew support from euro zone service sector data that was slightly stronger than expected.

Concerns over the impact of rising inflationary pressures amid soaring food and energy prices was also reflected in crude oil’s surge above $120 to a record high.

More bad news from the European banking sector weighed on risk appetite, led by Swiss bank UBS UBSN.VX, which unveiled large job cuts.

Reinsurer Swiss Re RUKN.VX announced another round of credit write-downs and said its first-quarter net profit had halved, missing analysts’ forecasts.

Data released earlier showed a pickup in euro zone service sector growth, with the RBS/NTC services PMI coming in at 52.0, slightly above a flash reading of 51.8.

“European equity markets have been a bit disappointing. We’re seeing a little bit of an increase in risk aversion with the investment community rotating back into the cyclically defensive currencies — so we’ve seen the Swiss franc, the yen and euro all rallying today,” JP Morgan G10 strategist Kamal Sharma said.

“Also, we had the PMI services numbers that give credence to the view that the euro zone economy is slowing but holding up pretty well in the face of downside risks to global economic growth,” he added.

The Australian dollar rose 0.2 percent to $0.9485, having retreated from a two-week high after the Reserve Bank of Australia held its key cash rate at a 12-year high of 7.25 percent and underlined its concern about demand.

Record high oil prices were seen reinforcing the European Central Bank’s focus on inflation, which President Jean-Claude Trichet on Monday termed a “significant” risk.

This underlined expectations that the central bank would keep rates at 4 percent when it meets on Thursday.

Analysts also broadly expected the ECB to stick with its hawkish line on inflation in Trichet’s post-meeting briefing on Thursday, despite a recent run of soft data, but some felt a psychological change in perceptions was already under way.

Reporting by Nick Olivari in New York and Naomi Tajitsu and Veronica Brown in London; Editing by Jonathan Oatis

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