The U.S. government took over the two mortgage giants, Freddie Mac and Fannie Mae, in an attempt to rescue the entire housing sector from total collapse as these institutions have guaranteed half of the $12 trillion in mortgage debt outstanding in the U.S. These two institutions have been experiencing liquidity crisis as a result of the sub-prime lending problems that has afflicted the U.S. economy over the past 18 months. As a result of this rescue, the U.S. Dollar surged to a one-year high against major currencies. Investors moved into higher-yielding currencies and shied away from currencies such as the Japanese Yen.
While most analysts agree that the U.S. Treasury made the right decision by taking over these institutions, there appears to be some concerns as to whether the problems in the housing sector can be resolved by this bailout.
In midday trading in London, the ICE Futures Exchange, an index which tracks the U.S. Dollar versus a basket of 6 currencies, jumped to 79.416DXY, a one-year high.
The Euro dropped to $1.4164, which is the lowest in almost a year, compared to $1.4198 traded late on Friday. The U.S. Dollar was up 0.3% at 108.46 Japanese yen, while the Euro fell slightly down at 153.67 Yen.
While the bailout package helped boost the U.S. Dollar, slow economic growth in the Euro zone and the U.K. certainly contributed to the strength of the U.S. Dollar. Analysts believe that the U.S. Dollar will continue to gain strength in the coming weeks.