Dollar falls on auto bailout stall

The dollar weakened against major currencies Monday - hitting a two-month low against the euro - amid strained auto bailout talk and as a two-day Federal Reserve meeting got under way.

At 1:34 p.m. ET, the 15-nation euro was trading at $1.3699, up 2.4% and the highest since Oct. 15. The British pound rose 2.4% to $1.5309.

Meanwhile, Japan's yen slid to ¥90.66, down 0.77%.
"Once again, we're seeing some fairly widespread pressure on the U.S. dollar," said Stephen Malyon, currency strategist at Scotia Capital in Toronto. "It's a carryover from the trend that began last week, and it looks to be driven primarily by the euro. It's one of the strongest currencies today and it's got momentum."

Speculation that the Federal Reserve will cut key interest rates to the lowest on record on Tuesday, plus the pressure of "a lame-duck president, increasingly at odds with his own party" also pressured the greenback, Malyon said.

Stalled bailout discussions cause uncertainty
The greenback's retreat comes after stalled auto bailout discussions late last week left investors in a state of uncertainty. On Monday, a Treasury Department spokeswoman said that officials were still reviewing information and that no decisions had been made.
President George Bush said last week he would consider using part of the Treasury's $700 billion bailout package for financial institutions to keep automakers afloat in the short term. The U.S. Senate refused to pass a $14 billion rescue package for Detroit's Big Three last week, leaving the Treasury with the decision.

"There's a concern about what will happen if the automakers are not bailed out, but there's also concern about how a bailout would be engineered," Malyon said.
A series of economic reports released Monday also painted a grim picture. Homebuilders' confidence remained at an all-time low in December, and a New York state survey of manufacturers showed a sharp growth in unfilled orders.

Dollar no longer a safe haven?
Currency traders usually view the dollar as a safe haven when the stock market is volatile. But despite relatively subdued trading, the dollar has remained under pressure.
"Given the lateness of the year, I don't see anything coming along to significantly alter trends," Malyon said. "In 2009, we could see a bit of pull-back on the euro. Right now, the story is focused on the U.S., but there's bad news in Europe too. The market shifts its attention to wherever the most interesting story is."

The uncertainty of the auto bailout hit the U.S. "at an inopportune time," Malyon said. "There's a vulnerability in power, and this indecisiveness unfortunately highlighted a lot of our problems.

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