The U.S. dollar and Japanese yen rose on Tuesday as risk aversion returned amid concerns Washington's bank rescue plan may not be enough to revive the weak financial sector. The fall in U.S. stock markets also drove investors to move their assets into safe haven currencies as such as the greenback.

In late New York, the dollar extended gains against the euro to as high as 1.2836 after Federal Reserve Chairman Ben Bernanke's prepared testimony to the House of Representatives Financial Services Committee failed to mention buying of U.S. Treasuries by the U.S. central bank. Instead, Bernanke said the Fed believes an array of extraordinary programs aimed at stabilising credit and banking have improved market conditions and eased strains despite a drumbeat of negative economic news, but that there was no quick fix.

The Japanese yen strengthened versus other currencies as as investors sold bank shares on concerns that the reworked U.S. stimulus plan to shore up the financial sector may not be enough to thaw credit markets and alleviate the deepening recession. Dow Jones industrial average index declined 4.62 percent or 381 points to close at 7888 while S&P 500 index and the Nasdaq Composite index also fell more than 4 percent to close at 826 and 1524 respectively. The dollar fell 1.3 percent against the yen to as low as 90.13 while the single currency dropped to 115.78 versus the yen before stabilising.

U.S. Treasury Secretary Timothy Geithner on Tuesday said in prepared remarks to the Senate Banking Committee that the Treasury was exploring a range of structures for a public/private investment fund that could eventually soak up $1 trillion of distressed assets from American financial institutions.

In other currencies, the British pound remained under pressure throughout the day and fell to as low as 1.4456 versus the dollar and to 130.41 against the yen, while the Australian and New Zealand dollars also dropped by 4.4 percent and 3.8 percent against the U.S. currency, trading to as low at 0.6485 and 0.5180 respectively.

On Wednesday, financial markets in Japan are closed for National Foundation day and economic data releases from other nations include Australia Wespac consumer confidence, German CPI final and HICP final, U.K. average earnings, claimant count, ILO unemployment, trade balance and BOE inflation reports, Canada trade data and the U.S. Fed budget.