* Dollar rallies vs yen on reports Paulson proposes RTC
* Dollar recoups some losses vs euro in broad surge
* Central banks move to ease money market tensions (Recasts, updates prices, changes byline)
By Nick Olivari
NEW YORK, Sept 18 (Reuters) - The U.S. dollar rose against the yen and recouped most losses against the euro on Thursday in a broad surge with U.S. stocks on reports Treasury Secretary Henry Paulson is talking about a Resolution Trust Corp-type solution to the current financial crisis.
Paulson has been shopping around a proposal to congressional lawmakers that would create an entity to deal with the bad debt, similar to what was done in the savings and loan crisis in the 1980s, a congressional aide said on Thursday. For more details, click [nN18475247].
"If the government can come up with a comprehensive plan that is viewed by the market as a plan that would help in containing the problems in the financial sector in the U.S., that would be seen as a very positive development," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
The dollar had traded to session lows against the yen as U.S. stocks fell in volatile trading, before share prices recovered on news of Paulson's plan.
The dollar was last up 1 percent against the yen at 105.36 yen
"It's a modernized version of the Resolution Trust Corporation, which was used after the S&L crisis," said the aide, declining to be further identified.
The euro rose 0.3 percent against the dollar at $1.4345
The dollar index on the ICE Futures Exchange .DXY, which tracks the greenback's performance against six major currencies, was down 0.2 percent at 78.081 after falling to its lowest since late August at 77.260.
Still, analysts warned that financial markets remain shaky even after the Federal Reserve and the world's other top central banks offered to pump billions of dollars into global markets to ease funding pressures. [ID:nSP129521].
Heightened jitters about the banking sector this week after the collapse of Lehman Brothers and the bailout of troubled insurer AIG (AIG.N: Quote, Profile, Research, Stock Buzz) exacerbated tension in financial markets, with banks reluctant to lend to one another.
Investors had sought refuge in the dollar in the past month amid turmoil in the financial sector. U.S. investors bailed out of overseas markets and sent money back home while foreign investors clung to the safety of U.S. Treasuries.
Yen buying had been fueled by the unwinding of carry trades that took advantage of the Japanese currency's low interest rates to purchase higher-yielding but riskier assets.
"We had the central bank action, which sent a wave of improved risk sentiment and that weighed on the dollar," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.
High-yielding currencies such as the Australian and New Zealand dollars also benefited, gaining against the U.S. unit. The Aussie dollar climbed 2.1 percent to US$0.8029
Investors were also monitoring developments at Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), as investors wondered whether it and rival Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) could continue as independent entities.
Morgan Stanley has held merger talks with U.S. regional banking powerhouse Wachovia Corp. (WB.N: Quote, Profile, Research, Stock Buzz). [ID:nN18450044]. (Additional reporting by Wanfeng Zhou and Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)
Source: Reuters.Com
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