FOREX-Dollar down as jitters persist, Stg falls on BoE plan

(changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, April 21 (Reuters) - The dollar fell against a basket of major currencies on Monday, with residual nerves about inflation pressures outweighing the positive spin seen from first quarter banking results last week.

Investors were still worrying about the inflationary effect of oil prices, which stayed on firm ground, near a record high of $117.40 a barrel.

Sterling fell, with markets unimpressed by a Bank of England offer to swap government bonds worth 50 billion pounds for banks' riskier mortgage debt to help them navigate through the credit squeeze. (For details please double click on [ID:nL21535439])

Results on Friday from Citigroup (C.N), the largest U.S. bank, showed less damage from the credit market crisis than some had expected with writedowns of $6 billion contrasting with market rumours of writedowns approaching $22 billion.

But investors, who have witnessed several 'false dawns' in the credit crisis, were reluctant to place too much faith in the banking results as marking the beginning of the end for the squeeze.

"Markets were hoping to come in today with a slightly more optimistic outlook for credit and risk appetite, but there's residual nervousness with oil prices continuing to squeeze up," Rabobank markets strategist Jeremy Stretch said.

"Markets are reasonably encouraged by the risk environment but maybe we've got a little bit ahead of ourselves and it's a case of having a bit of a reassessment this morning," he added.

By 0829 GMT, the dollar was down 0.1 percent against a basket of six major currencies .DXY at 71.852. Against the yen it also fell 0.1 percent JPY=, having earlier closed in on 7-week highs hit last week.

The euro gained almost 0.3 percent to 1.5856 EUR= but stayed well below last week's record high of $1.5983. Hawkish European Central Bank inflation rhetoric continued to support the common currency, and Governing Council member Klaus Liebscher said he saw certain indicators of second round effects in the euro area.

The comments were seen as continuing to cement expectations that euro zone interest rates will stay at 4.0 percent for now.

BOE PLAN FAILS TO IMPRESS

Despite a tentative pickup in risk appetite from last week's banking results and Royal Bank of Scotland (RBS.L), Britain's second-biggest bank, confirming it is considering a rights issue, UK markets had been on tenterhooks over the plan to help ease the strains in British mortgage markets.

But the pound extended losses in reaction to the news, falling around 0.4 percent versus the dollar to $1.9887 GBP=, while the euro was up 0.8 percent at 79.83 pence EURGBP=.

"The plan didn't offer any massive surprises ... Sterling has had a good run over the last few days on the news and so it's a bit of the 'buy the rumour, sell the fact'," said Daragh Maher, senior currency strategist at Calyon.

For more clues on the corporate earnings front, investors were awaiting reports from Bank of America (BAC.N), the No.2 U.S. bank, due later in the day.

"If the bank's earnings are within expectations, the dollar will likely rise further," said Mitsuru Sahara, senior trader at Bank of Tokyo-Mitsubishi UFJ.

But if the report card contains some nasty surprises, investors are likely to see no fundamental changes in the long-term downward trend in the dollar, he said.

(Reporting by Veronica Brown; Editing by David Stamp)