The U.S. dollar was mostly lower Monday, under pressure as traders found renewed appetite for equities after The Wall Street Journal reported that the U.S. government was in talks with Citigroup officials that could leave the federal government with a bigger stake in the banking giant.
The euro saw a temporary rise after a weekend meeting of European Union leaders in Berlin resulted in an agreement to bolster an International Monetary Fund emergency reserve for struggling economies and a commitment to aid ailing Eastern European countries.
Taken together, the developments helped boost traders' appetite for risk overnight, wrote strategists at Lloyds TSB. Asian and European equities rallied, while the dollar and Japanese yen came under pressure.
The euro was flat versus the dollar on the day, changing hands at $1.2821. The single currency had earlier flirted with the $1.30 level. The euro has bounced strongly after tumbling to a three-month low versus the dollar early last week.
The dollar index, a measure of the greenback against a trade-weighted basket of rival currencies, rose 0.3% to 86.653.
The dollar was up 1.2% against a broadly weaker Japanese currency at 94.45 yen.
The dollar and yen have tended to rally during periods of rising financial and economic turmoil, buoyed by safe-haven flows.
The Wall Street Journal said the U.S. government could wind up holding as much as 40% of Citigroup's common stock, while bank executives hope the stake will be closer to 25%. See full story.
"This news is seen as potentially supportive for the equity market, easing risk aversion and weighing on the greenback and the yen," wrote strategists at Brown Brothers Harriman. "The euro is also finding support from the united message that emerged from this weekend's EU meeting."
But doubts remained over how far equities will rally off the news.
"While this news is good for Citibank debt holders we doubt that equity markets can move lastingly higher at this stage," wrote strategists at BNP Paribas. "Government equity injections into banks seen [last fall and winter] in Europe had only a very limited positive effect on share prices, only to be followed by bank share prices dropping towards new lows."
Meeting ahead of April's Group of 20 summit, EU leaders proposed increasing the International Monetary Fund's financial resources for crisis management to $500 billion, in light of problems recapitalizing banks in Central and Eastern Europe. See full story.
The IMF now has $250 billion in resources and already used $50 billion.
Worries about the exposure of euro-zone banks to troubled Eastern European economies contributed to euro weakness early last week.
Beleaguered Eastern European currencies were slightly higher versus the euro Monday. The Polish zloty gained 1.4% to trade at 4.6699 per euro, while the Hungarian forint rose 2% to 298.40 per euro. The Czech koruna was 0.4% stronger at 28.445 per euro.
Improved sentiment in the banking sector lifted the British pound 2.8% versus the Japanese currency to 138.37 yen, while the euro tumbled 1.3% versus sterling to 87.75 pence. The pound rose 1.2% against the greenback to $1.4602.
British banks were on the rise, with Royal Bank of Scotland gaining ground on reports it plans a massive reorganization that will see it split into two units, scale back its investment-banking business and hold on to its U.K. and U.S. retail and corporate banking operations.
