The dollar was up against the yen as risk appetite picked up following rumours that the US Federal Reserve is considering a series of new measures to improve conditions in the credit markets.

The Fed is widely expected to cut US interest rates by 75 basis points when it meets next week but reports are now circulating that it could also implement a series of other measures to improve liquidity conditions. These include the Fed purchasing mortgage-backed securities issues and offering to lend directly to non-banks.

These reports lifted stocks markets in Asia and pushed up the yields on US Treasuries as investors' worries about the state of the American financial subsided slightly.

Ashley Davies, currency strategist at UBS (nyse: UBS - news - people ), said the reports will provide the dollar with some short-term support due to the rise in bond yields and drop in concern about the banking sector. However, he said even if the measures do come to fruition they are unlikely to prevent the US currency continuing to depreciate in the medium term.

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'To the extent that the policy measures are being inspired by concerns that banks have insufficient capital then it seems unlikely that the US dollar would be out of the woods by any stretch of the imagination and surely risk appetite will remain fragile,' he said.

The only major US release due out today is the January trade balance, which is expected to show a slight widening in the deficit to 59.6 bln usd from 58.8 bln in December.

Meanwhile the euro was steady ahead of the release of a key German economic expectations survey, stabilising after moving lower against the dollar yesterday.

The ZEW survey is expected to show confidence in the euro zone's largest economy deteriorated during February, with the economic expectations index dropping to -40 from -39.5.

'A weak German ZEW index today may well be used as an excuse to intensify

profit taking and consolidation against the dollar, especially since the US trade balance is unlikely to have a major market impact,' said Gavin Friend, currency strategist at Commerzbank.

Yesterday comments from European Central Bank president Jean Claude Trichet on the strength of the euro sent the currency lower as it raised the distant possibility the bank could intervene in the forex market.

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