By William L. Watts, Deborah Levine & Lisa Twaronite, MarketWatch
SAN FRANCISCO (MarketWatch) -- The dollar pared its losses against the euro and the pound Tuesday, though the yen took back some lost ground as Wall Street's early gains proved unsustainable and risk appetite faded anew.
The yen remained under pressure, as risk aversion faded in the wake of a global series of government bank bailouts. But the dollar came off its session highs against the Japanese unit as an early rally on Wall Street ran out of steam and indexes turned mixed before ending solidly lower. See U.S. Market Snapshot.
"The euphoria of recent aggressive efforts to kick-start interbank lending and to ease the structural demand for U.S. dollar in funding markets gave way to sober second thoughts," wrote David Watt, senior currency strategist at RBC Capital Markets.
"While there is hope that policymakers are finally in front of the crisis, it remains a fact that success is not guaranteed even if interbank lending is," he wrote in a note to clients.
The dollar index , which measures the greenback against a basket of six major currencies, fell to 81.551, down from 81.572 in late North American trading Monday.
Policy makers in Washington detailed their plan to shore up the U.S. banking sector.
Following similar moves by European governments, the Treasury said it would take as much as $250 billion in stakes in nine major banks in order to recapitalize the sector. See full story.
European Central Bank President Jean-Claude Trichet said Tuesday his close relationship with senior Federal Reserve officials enabled the aggressive and innovative response to the financial crisis.
The ties between the two central banks are "exceptionally intimate," Trichet said in a speech to business leaders in New York City. "This level of mutual confidence has been extraordinary useful in present circumstances."
Trichet's comments sounded "mainly like a justification for last week's cuts and a comment on this week's rescue packages, rather than an indication of future monetary policy," wrote currency analysts at Action Economics.
The euro fetched $1.3624, up from $1.3587 late Monday but down from its Tuesday high of $1.3767.
Keyed to equities
Earlier Tuesday, the dollar rose as high as 103.03 yen, but had last slipped back to 102.15 yen. That was still above 101.98 yen in North American trading late Monday.
The yen had cemented its role as the top risk-aversion currency, as financial turmoil deepened and equities plunged recently.
It rallied sharply against all major counterparts as foreign-exchange traders abandoned carry-trade strategies. Carry trades involve borrowing funds in low-yielding currencies, such as the yen, to buy assets denominated in higher-yielding currencies.
But hopes that the massive government bailouts now being undertaken in Europe and the United States will free up frozen credit markets and avert a collapse of the global financial system have increased risk appetite, traders said.
"It can no longer be said that governments across the globe are underestimating the severity of the current financial turmoil," said Christian Lawrence, a rates and foreign-exchange strategist at RBC Capital Markets. "It is now clear that no government will allow their financial system and economy to collapse."
Japanese markets were closed Monday for a public holiday. On Tuesday, stocks soared with a vengeance in Tokyo, with the Nikkei 225 Average posting a 14.2% gain for its biggest one-day percentage jump in history. See Asia Markets.
On Tuesday, Japan unveiled a series of its own measures aimed at market stabilization.
