The dollar rose sharply against the yen and the euro on Tuesday as a U.S. plan to cleanse banks of toxic loans improved sentiment toward U.S. assets. The plan detailed on Monday by U.S. Treasury Secretary Timothy Geithner caused the dollar to halt last week's slide, prompted as the Federal Reserve announced its massive balance sheet expansion would include buying government debt. Sterling posted strong gains, however, hitting a six-week high against the dollar after UK data showed an unexpected rise in CPI inflation. The euro was also under pressure as euro zone policymakers suggested that interest rates in the region could fall further, just as data showed manufacturing and services sector activity continued to contract significantly. "The initial reaction to Fed quantitative easing was to sell the dollar, but after the Geithner plan people started thinking that the U.S. is perhaps leading the global economy out of all this," State Street currency strategist Lee Ferridge said. "This U.S. recovery story benefits the dollar against both the yen and the euro," he said. At 7:30 a.m. EDT the dollar was up 1.2 percent on the day at 98.15 yen. The euro also rose 0.5 percent to 132.83 yen, having earlier struck 134.36 yen on trading platform EBS, its highest level since October. The yen remained under pressure as ongoing worries that the currency is overvalued combined with concerns about Japan's weak economy continue to erode the unit's safe haven status. The euro fell 0.7 percent against the dollar to $1.3534, down around two cents from the two and a half month peak of $1.3739 touched last week. This pushed the dollar index up 0.4 percent to 83.827 .DXY. Markets will be watching out for testimony before Congress by Fed Chairman Ben Bernanke and U.S. Treasury Secretary Geithner at 10 a.m. EDT. UK INFLATION SURPRISE Sterling rose to a six-week high of $1.4778 after data showed UK annual CPI inflation rose to 3.2 percent in February from 3.0 percent in January, confounding forecasts for a drop to 2. State Street's Ferridge said the knee-jerk reaction was to buy sterling, but there are lingering concerns about the Bank of England embarking on a quantitative easing policy at a time of high inflation. "This is not a good backdrop for a currency," he said. Meanwhile, euro zone policymakers continued to suggest that euro zone rates will fall further. European Central Bank governing council member Erkki Liikanen said the central bank has not used up all its "room for maneuver" on interest rates. The news followed comments overnight from ECB President Jean-Claude Trichet again said interest rates could be cut to help kickstart the economy. "The ECB has room to cut rates, which may undermine the euro slightly, but it's more a dollar story than the euro," said Carole Lualhere, currency strategist at Societe Generale in Paris. On top of that, there was more negative news on the euro zone economy, with key gauges of euro zone services and manufacturing showing activity in the sectors remaining weak as firms slashed jobs and prices.

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