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Dollar jumps on Paulson and Plosser comments

NEW YORK - The dollar rallied yesterday, after a Federal Reserve official suggested that US rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated yesterday that a strong dollar is important to US interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets.

At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labour and financial markets recover.

“US 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 US 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.

In early trading in New York, the euro fell 0.3 per cent to $1.5880, below its record high of $1.6037 set last week according to Reuters Dealing. The euro also held steady at 169.49 yen, near a historic peak of 169.92 set on Monday.

The dollar rose 0.3 per cent to 106.69 yen.

A slump in oil prices below $130 a barrel further boosted sentiment on the dollar. Crude-oil futures last traded down $1.47, or 1 per cent, at $129.69 a barrel.

The United States benefits from lower crude prices because it is such a heavy consumer of oil.

The US currency had earlier dropped against the yen and hovered near recent record lows against the euro after disappointing earnings from Wachovia Corp. and American Express. Their bleak results continued to fuel worries about the US financial sector and the economy as a whole.

Even with Plosser’s hawkish comment, analysts remained skeptical that the Fed would raise interest rates this year given the extent of the US downturn.

Compared with the Fed’s 2 per cent fed funds target rate, the European Central Bank’s 4.25 per cent base rate has kept the euro attractive for yield-hungry investors.

But there are further signs of the euro zone economy fraying. Data released earlier showed Italian consumer morale plunging to its lowest for nearly 15 years in July as sentiment crumbled over the state of the economy and future prospects.