Dollar falls as investors pare bets for higher rates

By Vivianne Rodrigues

NEW YORK (Reuters) - The dollar fell broadly on Tuesday, ending a two-day winning streak, as investors questioned whether the economy had improved enough to justify talk of higher U.S. interest rates by year end.

The euro rose above $1.4050 and sterling also rallied sharply while the U.S. Treasury said 10 of the country's biggest banks could repay $68 billion in taxpayer money received during the height of the credit crisis, boosting hopes the worst is over.

Nonetheless, investors were growing less certain that the Federal Reserve would raise rates in 2009, a view that gained traction last week after data showing a slower pace of U.S. job losses in May boosted the dollar and two-year Treasury yields.

Joseph Trevisani, chief market strategist at FX Solutions in Saddle River in New Jersey, said investors who bought the dollar recently betting on higher borrowing costs were at a "risk."

"Interest rates are not going to go up in this country anytime soon," he said.

Overall, investors remained wary of making big bets in favor of the dollar, especially as they rethought the chances of a Fed rate hike this year. Two-year Treasury yields eased earlier to 1.3 percent on Tuesday after rising above 1.4 percent on Monday for the first time in seven months.

The U.S. dollar held its losses against most major currencies even after an auction of 3-year notes by the Treasury Department showed strong demand for the debt.

The euro rose earlier to a session peak of $1.4052 before easing to $1.4010, up 0.8 percent on the day, while sterling added 1.3 percent to $1.6260 after falling to around $1.58 Monday. The dollar fell 0.7 percent to 97.68 yen.