Traders sold yen and dollars on Wednesday, as hopes for a plan from the Obama administration to take on bad bank debt sent equities surging and encouraged risk trading.
Both the dollar and the yen have been used as safe-haven currencies over the past year during the turmoil caused by the credit crisis.
"Investor confidence has improved this morning, driving currencies higher," said Kathy Lien, director of currency research, at Global Forex Trading. "Traders are quietly moving out of US dollars and back into higher yielding currencies thanks to news that President Obama is considering creating a bank that would absorb toxic assets," she said in a note.
The dollar index , which measures the U.S. unit against a basket of six major counterparts, stood at 83.815, down from 84.258 in late trade on Tuesday.
The yen, meanwhile, fell steeply against the euro, with Europe's single currency fetching 118.50 yen in recent action, up 1.2% from Tuesday.
Stocks rose in Europe and on Wall Street, the Dow Jones Industrial Average gained more than 100 points in early trade.
"The line of logic is that in an environment of rising risk aversion, you're buying dollar and yen and selling everything else," said Daragh Maher, a currency strategist at Calyon in London. "In an environment of growing risk appetite, you're selling yen and dollar and buying everything else."
A recent update from U.K. bank Barclays , which said it didn't need to raise capital, helped to quell some of the bank nationalization fears rampant in the British market, Maher said.
Meanwhile, the Federal Reserve's two-day policy meeting will end Wednesday but it is unlikely to garner as much attention as in other times, with interest rates already standing practically at zero.
Economists don't believe either that the central bank will alter very much the language in its new policy statement, expected Wednesday at 2:15 pm Eastern time.
But questions remain as to what else the central bank might do to stimulate lending. In its last statement, the Fed said it was "evaluating the potential benefits" of buying long-term Treasury securities.
Government plans to issue huge amounts of debts to finance economic stimulus plans have put some pressure on long-term U.S. government bonds, sending their yields -- and interest rates benchmarked to them -- higher. Buying long-term bonds, meanwhile, could help keep rates under control.
But according to Ashraf Laidi, chief market strategist at CMC Markets, the Fed, "rather than announcing its intention to purchase long term US treasuries, [...] is more likely to communicate its willingness to do so only as a defensive plan of action, i.e. in the event of renewed deterioration in financial markets."
