Dollar gains broadly on Plosser comments, oil slump

The dollar rallied on Wednesday, 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.
"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%, from a record $147.27 hit on July 11.
In late afternoon trading in New York, the euro tumbled 0.9% to $1.5776, 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, which measures the greenback against a basket of six currencies, rose 0.9% to 72.460.
Against the yen, the dollar rose 0.7% to 107.24 yen.
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 and Freddie Mac. 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 and American Express