The dollar rose against the yen and the euro on Tuesday as investors concluded a U.S. plan to remove bad loans from banks' balance sheets would do a lot to help the U.S. economy recover sooner than elsewhere. The plan detailed on Monday by U.S. Treasury Secretary Timothy Geithner caused the dollar to halt last week's slide after the Federal Reserve announced a massive expansion of its balance sheet that would include buying government debt. Sterling posted strong gains, however, hitting a six-week high against the dollar after British data showed an unexpected rise in consumer price 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 dollar is bid today but it's caught between two poles," said Dustin Reid, senior currency analyst, RBS Global Banking & Markets in Chicago. "One that says quantitative easing will cause eventual erosion and one that has people buying dollars now that Geithner's plan has helped regain some market confidence. You're going to have a lot of choppy trading as things swing between those two schools of thought." In New York trade, the dollar was up 1 percent on the day at 97.93 yen though off the day's high of 98.56 yen, according to Reuters data. The euro rose 0.3 percent to 132.59 yen, having earlier struck 134.50 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 $1.3536, down from the two and a half month peak of $1.3739 touched last week on EBS. The euro was almost midway between the session peak of 1.3678 and low of 1.3476, based on EBS data. Testimony from Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner had muted impact on trading. Bernanke in prepared testimony to the House of Representatives Committee on Financial Services said on Tuesday the September rescue of American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) was warranted to avoid a potential 1930s style meltdown, but showed new rules were essential. U.S. Treasury Secretary Timothy Geithner in prepared testimony to the same committee joined the Federal Reserve in calling for authority to wind down failing non-bank financial firms that threaten the financial system. UK INFLATION SURPRISE Sterling rose to a six-week high of $1.4778 after data showed British annual CPI inflation rose to 3.2 percent in February from 3.0 percent in January, confounding forecasts for a drop to 2.6 percent and staying above the central bank's two-percent target. It last traded up 0.7 percent at $1.4672. State Street currency strategist Lee Ferridge said in London 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 policy-makers continued to suggest that rates in the region 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, who again said interest rates could be cut to help kick-start 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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