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Monday March 23, 2009 - 09:38:38 GMT
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FOREX NEWS-Dlr falls as toxic asset plan boosts sentiment

Mon Mar 23, 2009 5:28am EDT

* Dlr continues to sag as U.S. toxic asset plan eyed

* Yen hits 5-mth low vs euro, 2-1/2 mth lows vs Aussie, kiwi

* ECB's Trichet: cenbank reluctant for rates to fall to zero

* U.S. to put in $75 bln-$100 bln into toxic asset programme

(Changes byline, dateline (previous Tokyo) recasts, updates quotes and prices)

By Kirsten Donovan

LONDON, March 23 (Reuters) - The dollar continued to sag on Monday as risk appetite improved on a U.S. plan to remove toxic assets from bank balance sheets after details of the scheme were revealed.

The Federal Reserve's plan to purchase longer-term Treasuries, which was announced last week, also continued to weigh on the greenback on concerns that the policy could lead to an oversupply in the world's main reserve currency.

Stock markets around Asia rose and European bourses opened higher as investors eyed plans by Treasury Secretary Timothy Geithner to purge U.S. banks of "toxic" assets.

Geithner is set to speak at 1245 GMT but a U.S. official gave details of the plan beforehand, saying the government would put in $75 billion to $100 billion from its bailout fund to partner with private investors and buy troubled assets at the heart of the financial crisis. [ID:nWEQ000809] [ID:nSP424881]

"Stocks are opening up so risk appetite is on the up, it seems Geithner has managed to instill a positive note in terms of the broad market this morning," said Rabobank strategist Jeremy Stretch.

"However, we need to hesitate because there are still some gaps in the details...but for now markets are buying into the risk recovery story...and that's a short-term negative for the dollar.

The dollar fell against a basket of currencies .DXY to 83.3, with investors continuing to favour currencies whose central banks had interest rates above zero and look unlikely use quantitative easing to get their economies moving, such as the euro, Australian dollar and Norwegian crown.

However, the pound also got a lift early on Monday due to the dollar's broader weakness.

The yen also slipped, falling to its lowest in five months versus the euro, and dropping more than 1 percent against higher-yielding currencies.

The euro <EUR=> rose 0.4 percent to $1.3644, after hitting a 2-1/2 month high at $1.3739 on EBS last week, while the pound GBP gained 0.77 percent to $1.4578. The Aussie dollar <AUD=> was the biggest gainer against the U.S. currency, up 1.54 percent at $0.6971, having hit a 2-1/2 month high of $0.7003.

Against the yen, the euro rose 1 percent to 131.54 yen <EURJPY=R>. Earlier, it hit its highest since late October at 131.99 yen. Japan's markets were shut on Friday for a national holiday.

The yen's broad slide lifted the Australian dollar to a 2-1/2 month high at 67.29 yen <AUDJPY=R> and the New Zealand dollar up a similar amount to 54.51 yen, having also hit 2-1/2 months highs earlier.

ECB WARY OF ZERO RATES

European Central Bank chief Jean-Claude Trichet signalled that the central bank remained wary of interest rates falling to zero in a newspaper interview published on Monday, in contrast with the U.S. and Japan, where rates are already almost zero. [ID:nLM557188]

Trichet said the ECB could cut rates further, from a record low of 1.5 percent, but there were drawbacks with policy rates at zero and the central bank did not think it would be appropriate.

The ECB has become increasingly isolated among major central banks as it has not moved beyond interest rate cuts to forms of quantitative easing to boost the recession-hit region.

The Bank of England has already begun buying government bonds to pump money into the system and the Bank of Japan last week raised the amount of government bonds it plans to buy.

The Fed's decision last week saw the dollar notch up its steepest weekly fall since 1985 against the basket of currencies.

"The question is whether the QE measures announced by the Fed last week and the toxic asset plan to be revealed today will be perceived by markets as having a significant chance of success," Barclays Capital strategists said in a note.

The Fed's move into QE is targeted at lowering all rates to avert deflation and stimulate the economy. It is also aimed at making it less profitable to hold cash and Treasuries, pressuring investors to put money into riskier but higher-yielding assets such as corporate bonds.

The U.S. Treasury will auction close to $100 billion of new Treasuries this week.

"This will be the first test of the Fed's ability to keep Treasury prices supported, against a backdrop of rising supply... For the dollar, the level of participation by foreign investors, as reflected in the indirect bid, will be of particular interest," Barclays said. The dollar firmed 0.4 percent to 96.25 yen <JPY=>, but was still well down from a four-month high of 99.69 hit earlier in March. It dropped to a one-month low of 93.55 last week. (Reporting by Kirsten Donovan; Editing by Toby Chopra)

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