The dollar clambered back from a near-record low against the euro Monday after the United States announced an emergency plan to restore investor confidence in mortgage finance companies Fannie Mae and Freddie Mac.
The Treasury boosted its direct credit lines to the government-sponsored enterprises and said it would buy their shares if necessary, while the Federal Reserve made its direct lending window to financial firms available to them.
The plan helped calm market concerns about the health of the U.S. financial and housing sectors, as the two companies fund half of all U.S. mortgages.
The dollar came off the session's high and stock indexes surrendered early gains as analysts noted the potential expense of the rescue and investors questioned whether the plan went far enough.
"The euphoria about the Fannie and Freddie bailout is fading," said Steven Butler, director of FX trading, at Scotia Capital in Toronto. "There are still a lot of problems in the mortgage market. The fact that stocks are having difficulty holding their gains is disappointing and hurting the dollar."
Underlining the tensions in the sector, federal regulators seized mortgage lender IndyMac Bancorp on Friday, one of the largest banks to fail in U.S. history.
Midway through the New York session, the euro was down against the dollar, having earlier come within half a cent of April's record high.
The greenback was also up versus the yen after earlier climbing as high as 106.81.
Analysts said the dollar's recovery would depend on whether the U.S. initiatives were enough to calm investors' concerns about the financial health of Fannie and Freddie.
Any improvement in their credit spreads and shares may help the dollar rebound further.
Russia's central bank said over the weekend it was happy with its holdings of roughly $100 billion of agency bonds, which includes Fannie Mae and Freddie Mac, but other central banks were silent.
As of mid-2007, China and Japan were the biggest long-term investors in agency bonds at $376 billion and around $228 billion respectively, according to U.S. Treasury data.
Investors will also be watching to see how the latest developments affect Fed Chairman Ben Bernanke's views on monetary policy and the economic outlook.
Bernanke will testify before the Senate Banking Committee on Tuesday and the House of Representatives' Committee on Financial Services on Wednesday.
"The (GSE rescue plan) news does nothing to calm fears on the extent of the unfolding economic slowdown and will raise speculation Bernanke will be unable to toe the hawkish line he might have wished to in this week's key semi-annual testimony," said Commerzbank Corporates & Markets.
Money markets have scaled back their expectations for monetary tightening from the Federal Reserve and now don't expect it to start hiking until the final months of the year.
That is potentially bearish for the dollar given the European Central Bank's rate rise to 4.25.