Dollar climbs as stocks retreat

Quick Vote

What do you think of Geithner's plan to enlist private firms in the bank bailout?

• It's good - we need their money
• It's bad - it won't work

or View results

Click the chart for current FX rates.

NEW YORK (CNNMoney.com) -- The dollar rose against the euro and the yen on Tuesday, but remained weak against the pound as stock prices fell and investors' appetite for risk waned.

"The retracement in the U.S. equity market is dragging higher-yielding currencies lower, except the British pound, and driving the U.S. dollar higher," said Kathy Lien, director of currency research, at Global Forex Trading.

Stocks slumped Tuesday after a massive rally in the previous session. That helped boost the traditionally low-yielding dollar, which often gains ground when stocks fall, as investors shied away from more risky currencies such as the euro.

The retreat in the stock market comes one day after the Treasury Department unveiled a new "Public-Private Investment Program" aimed at purchasing up to $1 trillion in bad assets from banks to cleanse their balance sheets and get them lending again.

But the traditionally high-yielding pound advanced, despite investors' diminished risk appetite, after a report from the British government showed U.K. inflation unexpectedly rose to 3.2% in February.

The data raised bets that the Bank of England will be forced to hold off on future interest rate cuts, which can erode the yield base of a currency, Lien said.

The dollar fell 0.75% against the pound to $1.4677 and gained 0.5% versus the euro to trade at $1.3559. The dollar advanced more than 1% against the yen to buy ¥98.07.

Meanwhile, the currency market is also digesting a call from China's central bank chief to overhaul the global monetary system by expanding the use of an alternate reserve currency to challenge the U.S. dollar.

"Special consideration should be given to giving the SDR a greater role," People's Bank of China governor Zhou Xiaochuan said on Monday. The International Monetary Fund's Special Drawing Right (SDR) is an accounting unit composed of a basket of currencies. It currently includes the euro, Japanese yen, pound sterling and U.S. dollar.

Increasing the role of IMF's SDR would help reduce dependence on any one country's currency and mitigate the impact of a single country's monetary and fiscal policies, Zhou said.

While the statement reflects China's uneasiness with the long-term prospects of the dollar, it was not a major factor in the currency market on Tuesday, Lien said.

"I don't think market is reacting to [Zhou's comments] because the dollar is rising, not weakening," she said.