* Inflation may call for higher rates, sooner - Plosser
* Paulson strong-dollar comments lend support
* Oil slumps more than 3 percent
(Recasts, adds comments, changes byline)
By Vivianne Rodrigues
NEW YORK, July 22 (Reuters) - The dollar rallied on
Tuesday, boosted by a steep drop in oil prices and comments
from a Federal Reserve official suggesting that U.S. interest
rates may have to rise even before financial markets recover.
Remarks by U.S. Treasury Secretary Henry Paulson
reiterating that a strong dollar was in the interest of the
nation also supported the greenback.
"The comments by (Philadelphia Federal Reserve President
Charles) Plosser and Paulson overshadowed weak results earlier
from Wachovia" bank, said Joe Manimbo, a currency trader at
Ruesch International in Washington. "The comments, combined
with the sharp drop in oil, lent good support to the dollar."
Plosser said on Tuesday that rising inflation could force
the Fed to start raising interest rates amid a surge in
inflation. Plosser is a voting member of the Fed's
policy-setting committee. For details, see [].
"U.S. officials are out in force this morning talking up
the dollar and attempting to restore some stability in the
financial markets," said Kathy Lien, chief strategist, at
DailyFX.com.
"With U.S. Treasury Secretary Paulson saying 'a strong
dollar is really very important' and Fed President Plosser
calling for a rate hike before the economy turns around, it is
not surprising to see the euro below $1.59," she added.
August crude-oil futures tumbled more than $4 to trade as
low as $125.63 a barrel, helping boost the dollar. Crude oil
has fallen $21.64, or 14.7 percent, from a record $147.27 hit
on July 11.
In late afternoon trading in New York, the euro tumbled 0.9
percent to $1.5776 <EUR=>, well below its record high of
$1.6037 set last week, according to Reuters Dealing. Based on
current prices, the single currency was on track for its
biggest daily fall in nearly three weeks against the dollar.
The dollar index <.DXY>, which measures the greenback
against a basket of six currencies, rose 0.9 percent to 72.460.
Against the yen, the dollar rose 0.7 percent to 107.24 yen
<JPY=>.
STRONG DOLLAR POLICY
Treasury Secretary Paulson on Tuesday repeated that a
strong dollar is "very important" to U.S. interests and that
the underlying strength of the economy, as well as policies
aimed at shoring up confidence, would be reflected in currency
markets. []
In remarks at the New York Public Library, Paulson also
affirmed his commitment to supporting the government-sponsored
housing finance giants Fannie Mae <FNM.N> and Freddie Mac
<FRE.N>. He said restoring confidence in these
government-sponsored enterprises is crucial to stabilizing
markets rattled by a year-old credit crunch and a sharp fall in
home values. [].
Even with Plosser's hawkish comment, analysts remained
skeptical that the Fed would raise interest rates this year
given the extent of the U.S. downturn.
Persistent worries about the U.S. financial sector and the
overall economy have continued to dampen sentiment toward the
dollar. Earlier in the session, the greenback came under
pressure following disappointing earnings reports from Wachovia
Corp. <WB.N> and American Express <AXP.N>.
(Additional reporting by Wanfeng Zhou in New York; Editing by
Jonathan Oatis)
