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Tuesday March 24, 2009 - 20:51:35 GMT
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FOREX NEWS-Dollar firms as U.S. bank plan optimism wanes

Tue Mar 24, 2009 4:41pm EDT

* Dollar gains as optimism on Geithner plan fades

* Sterling/dlr hits 6-week high on CPI data, King comments

* Euro pressured as policy-makers hint at euro rate cuts (Adds comment, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, March 24 (Reuters) - The dollar rose on Tuesday as optimism about a U.S. government plan to remove bad assets from banks' balance sheets dwindled, prompting investors to resume safe-haven bets on the greenback.

The dollar also gained support from a growing view that the Federal Reserve's quantitative easing -- buying U.S. Treasury debt while massively expanding Uncle Sam's balance sheet -- would not undermine the currency as many initially thought.

Sterling, meanwhile, posted strong gains, hitting a six-week high against the dollar after UK inflation rose unexpectedly in February and Bank of England Governor Mervyn King said the central bank's quantitative easing program may be reduced if it is successful. For details, see [ID:nLO953922]

"We're seeing a pullback in (U.S.) equities from yesterday's steep gains and that has caused a pause in the selling of the dollar. So this is the risk-aversion theme once again," said Ken Landon, a currency strategist at JPMorgan Chase in New York.

"The bloom has come off the euro, in particular, and its gains had been overextended anyway. When the Fed announced quantitative easing last week, people rushed to sell the dollar, but I would have thought commodity-based currencies such as the Aussie would have been much better alternatives than the euro," Landon added.

Although quantitative easing could lead to inflation as money supply expands, analysts said the other option is not to do anything, which could have more dire consequences for the dollar due to deflation and economic stagnation.


In late afternoon New York trade, the dollar was up 0.7 percent on the day at 97.71 yen <JPY=>, but off the day's high of 98.56 yen, according to Reuters data.

The euro fell 0.5 percent to 131.55 yen <EURJPY=EBS>, having earlier struck 134.50 yen on trading platform EBS, its highest level since October.

The yen remained under pressure as continuing worries that the currency is overvalued and concerns about Japan's weak economy, have eroded the unit's safe-haven status.

The euro dropped 1.2 percent against the dollar to $1.3462 <EUR=EBS>, down from the 2-1/2-month peak of $1.3739 touched last week on EBS.

The euro was also under pressure as euro zone policy-makers suggested interest rates in the region could fall further, just as data showed manufacturing and services sector activity continued to contract significantly.

The single euro zone currency was also undermined by rising expectations that the European Central Bank may be the next to adopt quantitative easing.

ECB Vice President Lucas Papademos said on Tuesday quantitative easing could be considered by the bank if more traditional means have been exhausted. [ID:nFAE002910]

"If that's the case, then why would you buy euro/dollar? Certainly, the ECB is hoping that it won't have to implement quantitative easing," said Robert Blake, senior currency strategist, at State Street in Boston.

"And if it does, there are doubts the ECB could actually pull it off given the legal and institutional hurdles," he added.

Among other currencies, sterling rose to $1.4778, the highest since Feb. 10. The pound <GBP=> last traded up 0.7 percent at $1.4671.

In Washington, U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke testified before Congress about bailed-out insurer American International Group Inc and regulation. [ID:nN24335995] Their testimony, however, had a muted impact on the currency market.

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