* Euro rises to two-week high vs dollar
* Citigroup memo on earnings boosts risk tolerance
* Yen rises vs dlr, but doubts persist about Japan economy (Updates prices, adds comment, change byline)
By Nick Olivari
NEW YORK, March 10 (Reuters) - The dollar fell against most major currencies on Tuesday as comments by Citigroup’s chief executive that the bank was profitable in the first two months of 2009 boosted stocks and prompted investors to pare back safe-haven bids on the greenback.
An improvement in risk appetite spurred a bounce in the euro, which rose to two-week highs versus the dollar. But analysts cautioned that the euro’s gains could be fleeting as the global macroeconomic environment and worries about banking systems worldwide remain supportive of the dollar as the world’s reserve currency.
The yen also rose against the dollar, though doubts about the Japanese currency’s status as a safe haven underpinned an overall defensive tone, traders said.
“We’re seeing a general rebound in risk appetite given improving stock performance,” said Omer Esiner, senior market analyst at Ruesch International in Washington.
“The Citigroup memo assuaged fears about the health of the banking sector, undermining the dollar’s safe-haven appeal. But this could be all temporary and the market is just probably booking profits on the dollar’s recent gains,” he added.
In mid afternoon New York trading, the euro rose 0.8 percent to $1.2715, after hitting a roughly two-week high at $1.2821 EUR=, according to Reuters data. The euro was also 0.8 percent firmer against sterling at 92.28 pence EURGBP= after earlier touching a five-and-a-half week high at 92.47 pence.
U.S. stocks .SPX .DJI gained sharply after comments by Citigroup (C.N) Chief Executive Vikram Pandit fueled optimism. Pandit, in an internal memo seen by Reuters, said the company was profitable in the first two months of the year and confident about its capital strength. [ID:nLA390055].
Some analysts, however, were skeptical the Citigroup-inspired rally in equities and currencies such as the euro would last.
“The market is talking about the Citigroup news, but at the same time the U.S. government is readying a fourth contingency plan for Citigroup,” said Adam Fazio, senior currency strategist at CIBC World Markets in New York.
“The government wouldn’t be putting a fourth plan in place if it didn’t think there was some chance that it would be needed.... So I think we’re going to get another round of bad news and I would be a buyer on dips here in the dollar.”
The euro, meanwhile, gained despite remarks from European Central Bank Executive Board member Lorenzo Bini Smaghi, who was quoted as saying the bank was prepared to cut interest rates to zero if deflation threatens and the economic situation worsens [ID:nLA201827].
Lower rates typically make securities in that currency less attractive and reduce demand for the currency to buy them.
The market showed little reaction to comments by Federal Reserve Chairman Ben Bernanke that sustainable economic recovery is out of reach until the U.S. financial system is stabilized [ID:nWEQ000763]. But Bernanke’s comments reminded investors that a lot needs to be done by governments worldwide to emerge from the downturn.
The pound managed to recover from a six-week low against the dollar, rising as high as $1.3905. It recently traded up 0.1 percent on the day to $1.3777 GBP=.
But the rebound was on shaky ground, since the currency shed 2 percent on Monday when Lloyds Banking Group (LLOY.L) intensified sector worries with its announcement the British government was taking a stake of up to 77 percent.
The dollar, meanwhile, reversed early gains against the yen and was last down 0.4 percent at 98.39 yen. The Japanese currency stayed weaker versus a broadly stronger euro at 125.14 yen EURJPY=.
The yen has fallen in the past month as Japan grapples with diving exports and the worst recession of the postwar era. Its current account balance swung to the largest deficit on record in January, adding to selling pressure. (Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by Kenneth Barry)