The dollar recovered ground against the yen and held firm on the euro on Monday as investors grew cautious about extending the greenback's recent losses ahead of this week's U.S. Federal Reserve meeting. The U.S. central bank is widely expected to raise interest rates for the first time in four years, marking the beginning of a measured campaign to ward off inflationary pressure in the fast-growing economy. Meanwhile, analysts said the formal transfer of sovereignty to an interim Iraqi government two days ahead of schedule gave marginal support to the dollar by easing some worries about geopolitical and security risks. "We are coming into the week where the Fed is finally going to take the decision move rates upward. That has given the dollar some support," said Chris Gothard, currency analyst at Brown Brothers Harriman. "The fact that the handover has actually occurred also might be benefiting the dollar slightly. People had been worried about the runup to it and suddenly it happened. The extended anticipation of it is suddenly over." At 1145 GMT, the dollar traded 0.50 percent higher on the day at 108.15 yen and a touch firmer at $1.2165 per euro , recovering from 10-week lows against the yen and two-week lows against the euro last week. Dealers said markets might remain hesitant throughout the week with Thursday's The Bank of Japan's quarterly "tankan" business survey and Friday's monthly U.S. jobs data making for a busy economic calendar. "It's a very important week. People are waiting for the Fed and as soon as that is out of the way, focus will change to the U.S. payrolls report at the end of the week. We also have the tankan," said Niels Christensen, currency strategist at Societe Generale.
"Everybody is firmly expecting a 25 basis point hike from the Fed. It is more a question of the wording of their statement." The Canadian dollar managed to keep a firm tone against the U.S. dollar, trading 0.20 percent higher on the day as Canadians started voting in a federal election likely to leave the country with its first minority government in 25 years.
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The yen lost some of the strong support it had enjoyed ahead of Thursday's tankan, though economists still predict Japanese corporate sentiment will record its best level since the bursting of the asset price bubble in the early 1990s. However, with the dollar having already fallen more than six percent from mid-May peaks around 115 yen and coming within sight of four-year lows set in April around 103.40 yen, dealers said the risk-reward balance of betting on a further dollar slide was deteriorating. Slightly soft figures for Japanese May retail sales also eroded support for the yen. "We had some retail sales numbers that came out slightly weaker than expected," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein. "We have had a very, very good move in dollar/yen. From a technical outlook, it looked ripe for a correction." Japanese retail sales in May were down 2.5 percent from the same month a year earlier, and down 1.2 percent from April on a seasonally adjusted basis. Policymakers at the U.S. central bank begin a two-day meeting on Tuesday and are widely expected to raise the overnight lending rate by quarter of a percentage point from a 46-year low of 1 percent. Higher interest rates tend to support a currency, though monetary tightening from the Federal Reserve has been priced in for a while. What the Fed has to say in the statement accompanying its rate decision may have more market impact than the decision itself. Meanwhile, the Bank for International Settlements said that central banks need to raise interest rates significantly once they are sure the global economic recovery is robust, and keeping rates higher in an upturn could prevent financial imbalances and asset bubbles from building. Japanese industrial output data for May, due on Tuesday, is also awaited for clues on the sustainability of the country's export-led growth. U.S. personal income and consumption figures for May are due later on Monday. Economists polled by expect rises of 0.5 percent in income and 0.8 percent in spending.///