* U.S. Treasury unveils revamped financial rescue package
(Recasts, updates prices)
By Nick Olivari
NEW YORK, Feb 10 (Reuters) - The U.S. dollar and yen gained on Tuesday as investors took shelter in both currencies amid concerns Washington's bank rescue plan may not be enough to revive the ailing financial sector.
Markets had pinned their hopes on the package, aimed at helping banks offload "toxic assets" and boost capital, but the intial reaction was lower stock prices, higher bond prices and a stronger dollar and yen, as investors looked for a safe haven.
The dollar extended gains against the euro after Federal Reserve Chairman Ben Bernanke's prepared testimony to the House of Representatives Financial Services Committee failed to mention buying of U.S. Treasuries by the U.S. central bank.
"Bernanke hasn't said anything yet that is new," said Meg Browne, currency strategist at Brown Brothers Harriman. "The options to buy Treasuries remain open, but he didn't mention it. The forex market is jumping a bit on this."
Late afternoon in New York, the euro was 1.0 percent lower against the dollar at $1.2877
The dollar fell 1.3 percent against the yen to 90.30
Instead, Bernanke said the Fed believes an array of extraordinary programs aimed at stabilizing credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news, but that there was no quick fix.
"Although the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea," Bernanke said.
Bernanke's "comment that the ample liquidity from the Fed is no panacea shows that obviously despite the Fed dumping billions of dollars of liquidity into the system, it's not going to be a quick fix," said Matt Esteve, foreign exchange trader at Tempus Consulting in Washington. "That's really what has turned sentiment south a little bit here"
The low-yielding dollar and yen are typically viewed as safe-haven currencies with low volatility. When stocks drop and the risk barometer climbs, investors repatriate funds and close out risky trades funded by these two currencies.
BAND-AID APPROACH
Earlier the U.S. Treasury Department unveiled a revamped financial rescue plan to cleanse up to $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program.
U.S. Treasury Secretary Timothy Geithner on Tuesday said in prepared remarks to the Senate Banking Committee, the Treasury was exploring a range of structures for a public/private investment fund that could eventually soak up $1 trillion of distressed assets from American financial institutions.
"We do not see convincing evidence that the government is moving away from its Band-aid approach to helping banks," said Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California.
"By now, the only viable solution left may be to nationalize the financial institutions that are deemed too big to fail; it's then a political decision whether depositors should carry part of the cost."
Merk took issue with the $1 trillion in consumer and business lending, saying that getting involved in specific credit allocation is best left to planned economies.
"When governments start picking industries and companies to subsidize, inefficiencies are created, leading to higher costs, lower competitiveness and ultimately a loss of jobs," he said.
U.S. Treasury Secretary Timothy Geithner on Tuesday said in prepared remarks to the Senate Banking Committee, the Treasury was exploring a range of structures for a public/private investment fund that could eventually soak up $1 trillion of distressed assets from American financial institutions.
Investors also took little comfort in a U.S. Senate vote that passed an $838 billion economic rescue plan on Tuesday, while also setting the stage for tough negotiations over the final size and scope of spending and tax cuts aimed at reversing the deep recession.
With scant Republican support, the Democratic-controlled Senate voted 61-37 to approve the package, which differs significantly from the $819 billion measure the House of Representatives passed almost two weeks ago.
The dollar was sharply higher against the Australian and New Zealand dollars. The aussie was down 4.4 percent against the U.S. currency
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