LONDON, Sept 18 - The dollar rose almost half a percent against the euro on Tuesday, supported by the previous day's coordinated rate cuts by major central banks and relief that U.S. stock losses defied the worst predictions.
The U.S. Federal Reserve, European Central Bank and Swiss National Bank were among those to cut interest rates on Monday to soothe concerns over sluggish growth after last week's attacks on the United States.
The U.S. currency held about one percent above Monday's seven-month lows against the yen, with markets wary of further Japanese intervention to cap yen strength.
"The fall in stocks was not as bad as feared and the rate cuts have helped to steady the dollar from sharp falls," said Neil MacKinnon, senior currency strategist at Merrill Lynch.
"However, the political situation is very uncertain and the upside for the dollar is limited."
News earlier that Afghanistan's ruling Taliban movement has announced a holy war against the United States, according to a broadcast on an Afghanistan radio station monitored by the BBC, knocked the dollar off its best levels.
But optimism following U.S. stocks' performance after a four-day hiatus helped support the dollar.
Analysts had expected losses of between five and 10 percent and in the event the blue-chip Dow Jones industrial average shed around seven percent <.DJI>.
At 0750 GMT, the dollar stood around $0.9200 per euro , more than one percent above Tuesday's six-month lows around $0.9330. It stood at 117.70 yen , little changed from late New York levels and about one percent above seven-month troughs set a day ago.
JAPAN WATCHES FOREX
Japan intervened in the currency markets on Monday to stem the yen's export-crimping strength and traders said markets remained wary of further Japanese action.
Finance Minister Masajuro Shiokawa said earlier on Tuesday Japan was not eager to intervene but would do so if necessary.
U.S. Treasury Secretary Paul O'Neill on Monday announced his support for Japanese intervention, a stand which will likely keep alive talk of the potential for further dollar-buying by the Bank of Japan (BOJ) or even the United States.
But with the mood in the forex market still uncertain, trade remained thin and there were still questions over the reliability of dollar settlement following last week's attacks.
Traders are also keen to find out what will happen in the second day of U.S. equities trading.
The euro stood near the day's lows around 108.25 yen , down more than half a percent on the day, dragged down by its losses against the dollar.
RATE CUTTING SPREE
With the Bank of Japan's policy board meeting in progress, dealers said there was pressure to ease Japanese monetary policy further following Tuesday's bout of rate cuts across the globe.
The Fed, ECB, Canadian, Swedish and Swiss central banks all lowered their key rates 50 basis points in a bid to bolster consumer confidence and boost economic growth.
Japan's central bank plans to end its meeting on Tuesday, rather than spreading it out over two days as is customary.
The presence at the meeting of Economics Minister Heizo Takenaka, who has constantly argued for looser policy since his appointment in the spring, was seen by the market to suggest further pressure being brought to bear.
"I think the BOJ will act and the most likely option is an increase in the current account reserves at the BOJ," said Shingo Funatsuki, foreign exchange marketing head at Citibank in Tokyo.
One central bank that has avoided action since last week is the Reserve Bank of Australia and dealers said its inaction has helped drive the Australian dollar below 50 cents for the first time in five months.