Dollar gains ground

Global markets bounce back

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NEW YORK (CNNMoney.com) -- The U.S. dollar rallied against major currencies Tuesday as investors appeared confident that Washington would be able to push through its massive bailout package.

Concerns about widening cracks in the European banking system also helped drive up the greenback.

The 15-nation euro was quoted at $1.4094 in New York, down from $1.4468 late Monday. At one point during the session, the euro slid nearly 3% to $1.4035, for the sharpest single-day drop in the currency's history.

Great Britain's pound fell to $1.7794 from $1.8417 against the dollar, while the greenback bought ¥106.21, up from ¥104.43.

The dollar's strength comes "as the market expresses some optimism Congress will eventually come to an agreement over a bailout package," Scotia Capital currency analyst Steve Malyon wrote in a note to investors.

House lawmakers rejected a historic piece of legislation Monday that would have used billions of tax dollars to rid the market of soured mortgage-backed assets that have undermined confidence in the financial system.

The bill's failure caught Wall Street off guard, sending the Dow Jones industrial average ending down 777 points Monday - its biggest one-day point-loss ever.

But the blue chip average rose 400 points Tuesday amid investor optimism that a rescue plan, in some form, would eventually pass muster.

"There's less of a fear factor today," said Peter Cardillo, chief market economist at Avalon Partners in New York. "Wall street sent a message to congress yesterday that something needs to be done."

Supporters of the planned intervention, including President Bush, say it is a critical first step in stabilizing the markets and forestalling further economic deterioration.

Speaking at the White House, Bush said Tuesday that he was "disappointed" by the House's rejection of the bill, adding that he expects lawmakers to move forward with the legislation.

"Our economy is depending on decisive action from the government," he said. "The sooner we address the problem, the sooner we can get back on the path of growth and job creation."

European banks struggle. While the dollar benefited from a perception that some form of bailout is imminent, a grim outlook for the European economy pressured the euro and the pound.

"Signs of ongoing strain in the European banking sector continue to weigh on [the euro]," said Steve Malyon, a currency analyst at Scotia Capital in Toronto.

Finance ministers in Belgium, France and Luxembourg said they would inject $9.2 billion into Belgian-French bank Dexia after shares of the company fell 30% on Monday.

Dexia follows in the footsteps of Dutch-Belgian banking giant Fortis NV, which was nationalized Monday after investor confidence in the bank evaporated last week.

Also on Monday, two key mortgage lenders in Germany and the U.K. received government bailouts to keep them afloat.

Meanwhile, the government of Ireland unveiled Tuesday an unlimited guarantee on deposits at six banks one day after the Irish Stock Exchange suffered its greatest fall in history.

Despite turmoil in the banking sector, European markets closed higher as investors cheered a coordinated effort by the European Central Bank, the Bank of England and the Swiss National Bank to provide extra cash to troubled financial institutions.

The European Central Bank is widely expected to hold its benchmark interest rate at 4.25% when it meets Thursday. Analysts expect the ECB to say it remains focused on combating inflation despite the growing strains in Europe's economy.

Meanwhile, expectations are rising that England's central bank may lower its key interest rate when it meets next week.