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FOREX-Dlr gives up gains, yen stays bid; mkt digests US plan

 * FX markets digest US financial rescue plan

* Dollar index off 0.2 pct at 85.50 .DXY, yen up

* Sterling down as BoE inflation report, UK jobs data loom

LONDON,  – The dollar gave back on Wednesday some gains made the previous session as dealers digested the implications of the latest U.S. financial rescue plan, while weak equity markets continued to support the yen.

The consensus was that the plan — which could total over $2 trillion — covered the key areas needed to stem the banking sector bleeding. However, it lacked fresh details and failed to meet the high expectations built into financial markets.

Rising aversion among investors to perceived risky assets such as equities and emerging market and higher yielding currencies generally benefit the yen, Swiss franc and dollar. This is how markets traded on Tuesday.

The dollar slipped back against most major currencies on Wednesday as dealers booked some profits, but the yen retained its broad gains as European equity markets followed Asia and Wall Street lower in early trade.

Sterling was the biggest mover among the majors, falling against the dollar and euro before the Bank of England’s quarterly inflation report and latest UK employment data, which are both expected to point to easier monetary policy.

The Swedish crown fell sharply after the country’s central bank surprised markets with a larger-than–expected interest rate cut of 100 basis points to 1.0 percent.

The main issue in currency markets on Wednesday, however, remained the bank plan unveiled by U.S. Treasury Secretary Timothy Geithner on Tuesday.

“The general sense is the market still has to come to grips with how it feels about the plan. There was nothing bad about the plan but it just perhaps wasn’t as bombastic as expected,” said Michael Hart, currency strategist at Citigroup in London.

“The hurdles for any kind of redemption (in the eyes of the market) are pretty high … but there are a lot of positives and negatives in this,” Hart said, adding that the markets are likely to adopt a more measured stance on Wednesday.

At 0840 GMT the dollar index was down 0.2 percent on the day at 85.40 <.DXY, and the euro was up 0.5 percent at $1.2965.

The dollar fell a third of a percent against the yen at 90 yen <JPY=>, while the Japanese currency posted larger gains against sterling and the Australian and New Zealand dollars.

Japanese investors were absent for a national holiday.

The pound was down half a percent against the dollar at $1.4425 <GBP=> and the euro was up 1 percent against the pound at 89.90 pence <EURGBP=>.

 

ALL ABOUT RISK

(For more on Geithner’s measures, which included a plan to set up a public-private fund that could absorb up to $1 trillion in bad assets from banks’ books, see [ID:nN102559])

Disappointment over the bank plan overshadowed passage of a $838 billion economic stimulus package by the Senate.

However, the Senate and the House of Representatives will now have to haggle over the shape and size of the final plan, leaving much uncertainty over the final size and scope of spending and tax cuts. [ID:nN10309684]

Should markets fail to warm to the plan, analysts at Credit Suisse expect the dollar to remain supported and so-called “riskier” currencies to suffer.

“The absence of a specific U.S. commitment to a bad bank structure is likely to put renewed pressure on sterling and, to a lesser extent, the euro relative to the dollar,” they said in a note on Wednesday.

In terms of data releases, the global economic picture remained pretty bleak.

Trade data from China released on Wednesday showed a 17.5 percent drop in January exports from a year earlier, and a 43.1 percent decline in imports.

The BoE will publish its quarterly inflation report at 1030 GMT, which could give clues on further interest rate cuts. The central bank is set to revise lower its estimate for growth. UK jobs figures for January will be released at 0930 GMT. [ECON]

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