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NEW YORK: The US dollar strengthened on Tuesday on comments from a Federal Reserve official indicating a rise in US interest rates may be coming sooner than the market believes.
The euro dropped to 1.5781 dollars at 2100 GMT after 1.5921 dollars on Monday.
The greenback meanwhile firmed to 107.25 yen, up from 106.41 yen late Monday.
Traders focused on comments by Philadelphia Federal Reserve president Charles Plosser, who warned in a speech that a hike in US interest rates was unavoidable in the short-term in the face of inflation pressures.
Terri Belkas, analyst at Forex Capital Markets said Plosser "drove the US dollar higher ... as he signalled that he would be voting to increase interest rates at the next Federal Open Market Committee meeting."
Belkas said Plosser "is one of the most hawkish members of the FOMC, along with Dallas Fed President Richard Fisher," and that both dissented in March and April when the Fed cut rates.
"Can these two hawks garner enough support for a majority vote in favour of an increase to the fed funds rate on August 5?" she asked.
She said this was "unlikely, as the move would likely ignite an even more severe credit crunch in the financial markets that would only exacerbate the confidence issues plaguing US, European, and British financial institutions - not to mention Fannie Mae and Freddie Mac."
Still, the remarks appeared to shift the debate on rates to a question of when and not if the Fed would boost rates.
Plosser's comments "are notably more hawkish than the views expressed by Fed chairman (Ben) Bernanke ... suggesting a growing split is developing within the FOMC regarding when tightening should begin," said analysts at Barclays Capital.
The dollar also found support from US Treasury Secretary Henry Paulson, who reiterated Washington's preference for a strong currency and renewed his backing for troubled US mortgage finance giants Fannie Mae and Freddie Mac.
Paulson said "the most important thing ... to support a strong dollar is confidence in capital markets and the economy," noted Melinda Smith of ABN Amro.
"He is 'quite confident' that Congress will approve a backstop plan for Fannie Mae and Freddie Mac this week which will boost confidence in the two (companies) and this he sees as the key to resolving the housing crisis."
In late New York trade, the dollar stood at 1.0302 Swiss francs from 1.0176 on Monday.
The pound eased to 1.9912 dollars after 2.0032. - AFP/de
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