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Dollar dips vs euro, sterling falls on BoE outlook

The general consensus was that the U.S. plan—which could total over $2 trillion—covered the key areas needed to stem the hemorrhaging in the banking sector. But it lacked fresh details and gave the markets little confidence that the Obama administration was doing anything significantly different from its predecessor to help end the financial crisis.

The dollar had rallied sharply on Tuesday after U.S. Treasury Secretary Timothy Geithner announced the plan as it boosted investors’ aversion to risk, something that generally benefits the yen, Swiss franc and dollar.

“Now that the dust has settled, we’re seeing some profit-taking on the dollar against the euro after yesterday’s big gains but it’s not a broad move,” said Adam Fazio, senior currency strategist at CIBC World Markets.

“People were expecting the government to come up with details on how to fix things. And it doesn’t sound that more details about the plan are forthcoming, so I think there is more risk inherent in the market.

For more on the U.S. government’s bailout package, which included a plan to set up a public-private fund that could absorb up to $1 trillion in bad assets from banks’ books.

In early New York trading, the euro rose 0.5 percent to $1.2953 EUR.

Sterling, meanwhile, fell against major currencies after a Bank of England report opened the way for further monetary easing.

The Bank of England’s quarterly Inflation Report showed the central bank predicting inflation receding sharply below target. The bank’s Governor Mervyn King said the projections suggested further monetary easing—possibly including buying gilts—may be required.

The pound was down 1.1 percent against the euro EURGBP at 89.85 pence, having hit a session low of 90.29 pence, and down 0.7 percent against the dollar at $1.4411 GBP.

The dollar was little changed against the yen at 90.23 yen JPY. Traders said the movements in the currency pair are being constrained by a huge options structure expiring later in the session at the 90 yen strike. This suggests that dollar/yen will trade not far from that 90 level until that option expires.

Another trader said the bias in the pair is still to buy dollars, with Japanese importers said to be on the bid side below 90 yen.

Overall, the market remains largely focused on the bank bailout package and the $838-billion economic stimulus package, which was passed by the Senate late on Tuesday.

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