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The greenback rallied on Tuesday, boosted by a steep drop in oil prices and comments from Philadelphia Federal Reserve President Charles Plosser suggesting that U.S. interest rates may have to rise even before financial markets recover to fight rising inflation. In addition, remarks by U.S. Treasury Secretary Henry Paulson reiterating that a strong dollar was in the interest of the nation also gave support to the greenback.

The European currencies tumbled against the dollar on Tuesday and the single currency and British pound fell to as low as 1.5778 and 1.9897 in New York afternoon trading respectively. The euro was on track for its biggest daily fall in nearly three weeks against the dollar and well below its record high of 1.6040 set last week. The euro also fell from its record high of 169.91 against the Japanese yen set on Monday to an intra-day low of 169.05 before rebouding.

On the other side, the dollar rallied against the Japanese yen and Swiss franc after the hawkish comments by Plosser and Paulson and the pairs rose to session highs of 107.45 and 1.0335 respectively in U.S. afternoon. The retreat in oil prices also helped to boost the dollar and August crude-oil futures fell $3.09 and ended at $127.25 at New York closing after touching $125.63 (Crude oil has fallen $21.64, or 14.7 percent, from a record $147.27 hit on July 11).

The dollar’s strength across the broad pushed the price of dollar index higher, which rose 0.9 percent to 72.460. Futures traded on the Chicago Board of Trade showed a 49 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 41 percent odds on Monday.

On Wednesday, economic data releases including Australia second quarter CPI data, U.K. Bank of England MPC vote outcome (8:30GMT) and CBI industrial trends, Eurozone industrial orders and Canada CPI data.

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