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Dollar Rises as Data Shows Higher U.S. Inflows

The dollar extended gains on Tuesday after U.S. Treasury data showed foreigners increased purchases of U.S. assets in February, easing some concern that the credit crisis would dry up U.S. capital inflows.

The euro fell against the dollar from about $1.5815 before the data, while the dollar rose versus the yen from about 101.30 yen.

The dollar rose from earlier lows after data showed a bigger-than-expected rise in U.S. producer prices last month, suggesting the Federal Reserve may not have to keep cutting interest rates quite so aggressively.

The euro came within half a cent of record highs against the dollar before trading slightly lower as European policymakers reiterated a hawkish monetary policy stance and jitters on the health of the U.S. economy persisted.

Those jitters, and fresh doubts about credit markets, are overshadowing support for the dollar from the Group of Seven financial leaders' strongest expression in seven years about volatility in major currencies, traders said.

The euro meanwhile was boosted by the European Central Bank's continued inflation focus, which analysts reckon will prevent it from cutting rates for a few more months.

ECB Executive Board member Juergen Stark and Governing Council member Miguel Angel Fernandez Ordonez stressed the bank's commitment to price stability in separate comments on Tuesday.

The head of Germany's ZEW economic institute said he would recommend the ECB not to lower rates this year after the current conditions component of its economic sentiment index rose.

"The euro zone ... is set to remain on hold (on rates) in the near term and that's supporting the euro," said David Pais, currency strategist at Citi.

"Investors are nervous ahead of bank earnings with markets waiting to see how big writedowns are and how bad things are." Results from Merrill Lynch and Citigroup are due later in the week, with analysts expecting both to announce billions of dollars in bad debt write-downs.

With French EU-norm inflation jumping to a record 3.5 percent year-on-year last month, the data should keep ECB rhetoric hawkish, analysts say.

ECB President Jean-Claude Trichet and Governing Council member Axel Weber attend a book launch at 4 pm London time, and Executive Board member Gertrude Tumpel-Gugerell speaks at a banking conference in Athens at 6:30 pm.

Sterling Slides

Sterling fell versus the dollar and hit a record low of 80.65 pence per euro after the Royal Institution of Chartered Surveyors' British house price survey showed the lowest reading in its 30-year history.

"This is a clear signal that things in the housing market are getting worse," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.

"The mid-term trend in sterling is to remain lower." The euro has risen around 9 percent versus both sterling and the dollar since the start of the year.

The G7 financial heads said on Friday they were worried that sharp currency moves could undermine economic and financial stability.

But analysts were skeptical whether those words would translate into coordinated intervention to prop up the dollar.

The dollar has come under pressure due to a sluggish U.S. economy -- which some think is already in recession -- and 3 percentage points in rate cuts since September.

The Federal Reserve is expected to cut its fed funds rate again later this month from the current 2.25 percent.

The health of the U.S. financial sector remained in the spotlight after Wachovia, its fourth-largest bank, posted a surprise first quarter loss due to credit problems from mortgages and other debt, and cut 500 jobs.

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