Dollar bolstered by Obama stimulus plan, ECB outlook

By Nick Olivari

NEW YORK (Reuters) - The dollar posted sharp gains against the euro and yen on Monday, buoyed by a planned U.S. stimulus package and increased expectations of interest rate cuts by major central banks other than the Federal Reserve.

Investors welcomed news that U.S. President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a proposed stimulus package that could be worth up to $775 billion.

"The combination of tax cuts, infrastructure spending and job creation under the Obama stimulus package takes out some of the pain from the economic recession we're in," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.

"The Federal Reserve and U.S. Treasury are being pro-active in dealing with this crisis. I think at some juncture, the U.S. efforts would turn the economy around quicker than many of the other countries and that should be dollar-positive," he added.

The yen, on the other hand, fell to more than three-week lows against the dollar amid improved risk appetite, with bargain prices and hopes for a global economic recovery this year prompting stock market gains in Europe and Japan.

The euro, meanwhile, hit three-week lows against the dollar, with weaker-than-expected inflation data in Italy and Spain and tax cuts in Germany seen raising pressure on the European Central Bank to cut interest rates further.

Analysts said the euro's rally in December was too far, too fast given the feeble state of the euro zone economy.

In late New York trading, the euro weakened 2.1 percent on the day to $1.3587, after earlier touching $1.3548 -- its lowest since mid-December, according to Reuters data.