* Yen falls as stocks rally in wake of US bank plan
* Dollar index rises, profit-taking caps euro
* Trichet hints at further rate cut
(Changes byline, updates quotes and prices, changes dateline. Previous: TOKYO)
By Jamie McGeever
LONDON, March 24 (Reuters) - The yen fell to multi-month lows on Tuesday as optimism about a U.S. plan to rid banks' balance sheets of toxic assets continued to drive financial markets and boost riskier investments like stocks.
The dollar's trade-weighted value rose on the improving sentiment toward U.S. assets, halting its fall last week triggered by the Federal Reserve's announcement that its balance sheet expansion of over $1 trillion would include purchases of government debt.
The euro backed down from the peaks hit in the wake of the Fed's announcement last week, after European Central Bank President Jean-Claude Trichet again said interest rates could be cut to help kickstart the economy.
The dollar consolidation and profit taking on the euro on Tuesday showed currency traders trimming some of the bets built up in recent sessions as they waited to see if equities could extend their sharp gains from the previous session.
A raft of policymakers, including Fed Chairman Ben Bernanke and U.S. Treasury Secretary Tim Geithner, are scheduled to speak later in the day and European purchasing managers and UK inflation data are due for release too.
"In the context of equities rallying, yes, the yen is broadly weaker," said Carole Lualhere, currency strategist at Societe Generale in Paris.
"But it's more consolidation (in the dollar) ... and maybe last week's rally on euro/dollar was slightly overdone. The ECB has room to cut rates, which may undermine the euro slightly, but it's more a dollar story than the euro," she said.
At 0840 GMT the dollar was up 1.1 percent on the day at 98.10 yen, and the euro was up 0.8 percent at 133.35 yen, having earlier struck 134.36 yen on trading platform EBS, its highest levels since October.
The euro was down 0.3 percent from late New York to $1.3585 , down around a cent and a half from $1.3739 touched last week.
This pushed the dollar index up 0.2 percent to 83.60.
EURO CAPPED?
The U.S. government's plan announced on Monday to clean banks' balance sheets of up to $1 trillion of toxic assets got a vote of confidence from stock market investors, with Tokyo shares rising more than 3 percent.
European stocks rose too, following U.S. stocks' 7 percent surge on Monday, their biggest one-day advance in nearly five months.
The dollar took heart, reversing some of the losses it suffered after the Fed said last week it will boost the money supply but buying a range of assets, including Treasuries.
In a sign of growing debate over the dollar's status as the dominant global reserve currency, Chinese central bank chief Zhou Xiaochuan said on Monday that Special Drawing Rights allocated by the International Monetary Fund could be used as a super- sovereign reserve currency, eventually displacing the dollar
The euro, often seen as the "anti-dollar" trade, would probably benefit from any longer-term move by major reserve managers to reduce their dollar holdings. But in the short-term, investors are more concerned about the fragile euro zone economy.
"The market is looking at Europe and seeing a severe slowdown ... and are not seeing the ECB adequately providing support," said Lauren Rosborough, currency strategist at Westpac.