* Fed's Plosser says need for tighter policy soon
* S&P's downgrades Portugal; traders watch EU summit
* Australian dollar hits 29-year high versus U.S. dollar (Rewrites first paragraphs to update with Fed official, updates prices, adds quotes, details)
NEW YORK, March 25 (Reuters) - The U.S. dollar rose to a session high against the euro on Friday and is likely to remain buoyant in the week ahead after a Federal Reserve official said the central bank will have to tighten monetary policy soon to avoid sowing the seeds of inflation.
Speaking in New York, Philadelphia Federal Reserve Bank President Charles Plosser said consumer spending continues to expand at a "reasonably robust pace" and the labor market is improving. The overall economy, he said, has gained "significant strength and momentum" since the summer. For details, see [ID:nLDE72O1T3]
U.S. non-farm payrolls data for March will be released on Friday. Always a key indicator for foreign exchange markets, the report will be more closely watched than usual for a clue as to when U.S. interests rates may rise.
"Strong payrolls data next week would give hawks within the Fed more ammunition and could raise the risk of an adjustment to the bank's official statement following its next policy meeting," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Such a scenario would add significantly to the dollar's relative yield appeal."
The euro
The euro is also being pressured in the short run on concern about a worsening debt crisis in Portugal following the collapse of the country's government.
But investors also say that while a pullback in the single currency is likely, the euro should be supported as long as it holds above $1.40. Expectations of a euro-zone interest rate rise next month have helped its resilience despite worries about heavily indebted Portugal and Spain.
"For most of the week the market has treated Portugal as an isolated problem that will not spread to other parts of Europe, but this sentiment is losing popularity very quickly," said Kathy Lien, director of currency research at GFT in New York.
PORTUGUESE DEBT
Portuguese debt yields hit new highs on Friday after Standard & Poor's downgraded the country's credit ratings and warned it could cut them again. Investors were also disappointed after EU leaders delayed finalizing a package set up to bail out failing peripheral economies. [ID:nL3E7EO3OJ]
The euro's failure to break through option barriers around $1.4250 this week has seen some traders cut back long exposure. Further resistance lies near $1.4280, the November high. Support is seen around $1.4036, the high set on March 7. Technical analysts said a weekly close above $1.4200 would leave it well positioned for a further rise.
"However a failure to establish above the 1.4200 level could result in a large bearing reversal in the pair, as the level represents a descending channel top going back to June of 2009," said Brendan McGrath, senior analyst at Wester Union Business Solutions in Victoria, British Columbia.
European leaders reached agreement on a new package of anti-crisis measures at a two-day summit but were forced to delay increasing their rescue fund and acknowledged they faced new threats from a government collapse in Portugal. See [ID:nLDE72O009]
AUSSIE PEAK
The higher-yielding Australian dollar hit a 29-year peak of
against the U.S. currency at $1.0294
The dollar was up 0.4 percent at 81.27 yen