The dollar slipped to a two-week low against the euro while the yen fell broadly on Wednesday as a tentative agreement by U.S. lawmakers to rescue American automakers helped calm investor sentiment.

The White House and congressional Democrats reached a deal in principle on a $15 billion plan to bail out and restructure auto firms, with officials saying the House of Representatives could vote on it as early as Wednesday.

“The market is still feeding off hopes for mass fiscal stimulus in the U.S. once (President-elect Barack) Obama takes office,” said Stephen Malyon, chief currency strategist at Scotia Capital in Toronto.

Specific to the auto bailout, “in so far as how it is boosting equities, that is important for the foreign exchange market.”

U.S. stock futures rose on Wednesday, a sign of rising risk tolerance, due to bailout hopes. That led to an easing of the move to unwind carry trades, which use the yen — whose interest rate is near zero — to fund purchases of higher-yielding assets.

In early New York trade, the euro edged up 0.3 percent to $1.2948, having earlier hit a two-week high of $1.3004, according to Reuters data.

The dollar rose 0.7 percent to 92.78 yen , while the euro gained 1.1 percent to 120.28 yen. The yen was down 1.2 percent against the Canadian dollar , 0.7 percent against the Swiss franc and 1.1 percent against the pound , according to Reuters data.

Analysts said fears of Bank of Japan intervention to prevent too much yen strength also weighed on the currency after BoJ Governor Masaaki Shirakawa said on Wednesday he was watching forex moves carefully.

But few expected action any time soon.

“A comment from BoJ Governor Shirakawa that the Ministry of Finance has the option of intervening was a statement of fact to lawmakers rather than a hint that intervention is imminent,” said Brown Brothers Harriman in a note to clients.

Analysts said trading in recent days is less active than usual with little economic data to drive market moves and investors beginning to wind down for the year-end holidays.

“We’re seeing subdued days in foreign exchange markets,” said Scotia’s Malyon. “We are also in a week where there is not a lot of direction.”

US BAILOUT IN FOCUS

Analysts believe the falls in the yen are likely to be short-lived as global recession fears keep risk aversion high.

The prospect of interest rates in other developed countries falling towards the low rates in Japan will also keep the Japanese currency supported, they said.

Traders waited to see whether the House of Representatives would approve the automaker bailout, which includes conditions to provide low-interest loans to avert a threatened industry collapse if one of the three U.S. auto firms were to fail.

Some market participants are sceptical on whether such a plan, if passed, would actually save the struggling auto sector, while others argue that it would ultimately do little to cure the global recession.

“The market may yet reach a stage where interest in risk assets cannot be justified by the underlying conditions in the global economy,” analysts at UBS said in a research note.

Nick Olivari
NEW YORK, Dec 10 (Reuters)

The bailout, of course, dominated the day’s news.

Why traders found it dollar positive is a mystery, since the government has put itself on the hook to make good on potentially $100 billion of bad loans per company. And the one thing we know about initial estimates is that they almost always go higher. That will either require a lot of dollars from us, or the revving up of the printing press.

Typical of the cheerleaders was Paresh Upadhyaya, a senior vice president at Putnam Investments in Boston, who said that, “The Federal Reserve and government are doing everything to bring the house in order, while most of the rest of the world hasn’t even started to stimulate their economies … I would view the Treasury’s announcement as being a positive for the dollar in the medium, longer term. It’ll entice foreign flows into U.S. fixed-income assets.”

“It does address the key risk to the U.S. financial system,” said Stephen Malyon, of Scotia Capital in Toronto. “But it’s not a panacea for the market. It’s not solving the problems with the ongoing falling housing prices and mounting consumer debts. I do think the market will get over it pretty quickly.”

Well, one could argue that the takeover may have been required, in order to keep our entire financial house of cards from collapsing, as many have suggested. But it establishes a terrible precedent. What about the next bank that comes to Washington, hat in hand? And the one after that.

Just over the weekend, Nevada-based Silver State became the 11th bank to shut down so far this year. It had a fellow bank willing to take it over, but what if it hadn’t? The federal government should not be in the private banking business. That road leads to a state-controlled finance system, and we surely don’t want to go there.

Source: Dollar Bulls Inexplicably Ecstatic

Platinum was up in the European market, but traded rangebound in New York, ending with a nice gain at $1429/oz., up $34. Overnight, platinum has been pushing higher.

Silver was also up strongly in the overseas markets, but fell more steeply and was unable to stay out of the red, closing at $13.46/oz., down 11 cents. Overnight, silver is sharply higher.
(Click here for charts)
Although platinum did well, and gold was up slightly, silver dropped and, overall, precious metals fanciers couldn’t have been very happy with the outcome of the day’s action, since the falling dollar and rising oil should have been more supportive.

The Hightower Report summarized: “The gold market forged a series of stair steps down from the early morning highs but generally gold prices seemed to prefer positive ground. Clearly the weakness in the Dollar failed to live up to initial expectations for the bull camp and that wasn’t surprising considering that the US Durable Goods report was better than most expectations. Surprisingly the gold market didn’t seem to get a definitive added lift from what seemed to be escalating geopolitical tensions between Russia and the EU. Some gold traders suggested that until the September Dollar Index consistently trades below the 77.00 level, the currency impact for gold might not be definitively supportive.”

Gustav was much on everyone’s mind.

Gold can be expected to benefit if there is any disruption to oil supplies created by the hurricane.

But the turmoil in the weather is equaled by the turmoil in the financial markets.

With widespread expectations that a number of banks, including perhaps some major ones, may yet fail, “Gold is benefiting from systemic fear,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “Systemic fear is what’s kept gold off its lows.”

Silver, though, remains shaky. It has fallen 9% this year, compared with gold’s decline of less than 1%. Analysts at Scotia Capital USA wrote yesterday that until silver trades above $14, the metal will be vulnerable to further declines.

Source: Precious Metals Uncertain