The US dollar has risen against other major world currencies following the announcement of a $674bn package of measures for the American economy.

The perking up of the dollar comes against a background of recent falls, with currency traders taking a dim view of prospects for the sluggish US economy and preparations for possible military action against Iraq.

"The geopolitical environment is still not friendly for the dollar but the Bush package has given the currency a short-term psychological boost," said Steve Barrow, currency strategist at Bear Stearns.

But US shares ended the day slightly lower, reversing some of the gains seen in Monday's 172-point rise in the Dow Jones industrial average.

Will it work?

Traders were weighing up whether the Bush plan would be effective.

"Speculation that favourable tax treatment of business investment and an end to double-taxation of stock dividends would boost US share prices also (helps) the dollar," said Jes Black, a currency strategist at MG Financial Group in New York.

But he added: "Any further equity gains based on these measures will prove fleeting because the market cannot maintain a rally from a stimulus plan that addresses only the symptoms of this downturn and not its cause."

The Dow Jones index closed down 32.98 points at 8,740.59.

The dollar was trading at $1.0415 per euro in late US trade, and was up nearly 1% against the Japanese yen with one dollar buying 120.5 yen.

Bad news in euroland

On Monday, a speech by Iraqi leader Saddam Hussein heightened tension in currency markets, sending the dollar lower.

Mr Hussein had said Iraq was ready for a military attack and accused UN weapons inspectors of carrying out "pure intelligence work".

Tuesday's dollar rise was also propelled by bad news for the euro, with a key German survey showing an unexpectedly sharp fall in consumer confidence in Europe's biggest economy.

The gloom in Europe was compounded by German think-tank DIW, which cut to 0.6% its forecast for German economic growth this year.