By Nick Godt & William L. Watts, MarketWatch NEW YORK (MarketWatch) -- The dollar reversed course to trade sharply lower on Tuesday after the Federal Reserve unveiled a $200 billion plan to support the issuance of loans to consumers. "The Bush administration bailed out Citigroup yesterday and has now made a colossal announcement aimed at putting a bottom in the asset market," Kathy Lien, director of currency research at Global Forex Trading, wrote in a research note. The move, she said, will cause the Fed's balance sheet to balloon to $3 trillion. "For investors that have been concerned about the funding crisis, this is an even bigger reason to sell dollars," Lien wrote. The dollar index , which tracks the U.S. unit against a basket of six major currencies, stood at 84.875, compared with 86.198 in early trade and from 85.912 in late North American trade Monday. And in U.S. economic news, the Commerce Department said the U.S. economy contracted at a 0.5% annual rate in the third quarter, worse than the negative 0.3% estimated a month ago. The revisions to gross domestic product were largely due to weaker consumer spending. Separately, Standard & Poor's said home prices in 20 major U.S. cities dropped 1.8% in September from the previous month, and had fallen a record 17.4% from the previous year, according to S&P's Case-Shiller home price index. Earlier, the Japanese yen and the dollar had rebounded as worries about the impact of the global economic slowdown came back into focus. The move marked a reversal from Monday, when the two currencies tumbled as world equities soared in the wake of a massive U.S. government bailout of troubled lender Citigroup . "Risk aversion should stay elevated, given that global recession fears prevail," wrote strategists at Commerzbank in Frankfurt. "The list of potential trouble spots simply is too long for a long-lasting normalization," they said. At KBC Bank in Brussels, economists remained cautiously negative on the euro's prospects, but they noted the single currency has demonstrated increased resilience of late. Over the short term, "swings in global risk aversion will continue to set the tone" for trading in the euro against the dollar, they told clients. "So, the key question is whether global markets have entered calmer waters and whether [Monday's] stock market rally is more than a one-day correction," they wrote. "At least for now, there are no (technical) indications that something has changed in a fundamental way," they said. The euro rose to $1.3021 from $1.2905 in Monday's action and traded at 124.61 yen as opposed to 125.07 yen. The dollar lost ground to the Japanese currency, sliding to 95.68, compared with 97.02 yen late Monday. Cementing expectations for European recession Euro-zone economic data released Tuesday reinforced already widespread expectations for a potentially deep recession. A second estimate of German third-quarter gross domestic product confirmed the initial estimate of a 0.5% contraction, which leaves Europe's biggest economy in recession. The British pound lost ground, slipping to $1.5088 after having surged to $1.5150 late Monday. London's FTSE 100 stock index on Monday joined the global equity surge to post a record one-day jump as Chancellor of the Exchequer Alistair Darling unveiled a controversial fiscal-stimulus plan valued at 20 billion pound ($30 billion). See full story. Bank of England Governor Mervyn King told a parliamentary committee that the stimulus package combined with other fiscal measures and interest-rate cuts "will act to mitigate" the U.K. economic slowdown over the next year. The central bank earlier this month slashed its key lending rate to 3%, the lowest level since 1955. "Much though still remains to be done and very significant policy challenges lie ahead," King said. "Domestically, the most pressing is to ensure that normal bank lending is resumed."

Source