The dollar firmed on Monday as investors looked to higher U.S. interest rates after a Federal Reserve meeting this week, while the focus remained on currency policies ahead of a gathering of Group of Seven rich nations.
The greenback also received support after Iraq's election on Sunday went ahead without a major hitch.
In a week packed with events, the Fed is expected to raise interest rates for a sixth time since June on Wednesday from their current 2.25 percent. Higher rates raise the appeal of dollar deposits and have helped offset a negative impact on the dollar from the huge U.S. twin deficits. Key U.S. data including employment and manufacturing are also due, while G7 finance ministers and central bankers are scheduled to meet in London on Friday and Saturday.
"This is a significant week for the dollar. The Fed's statement will maintain the 'measured' language but there is a real risk the Fed could raise rates faster, probably 50 basis points in March," said Adam Myers, foreign exchange strategist at Societe Generale.
"Safe-haven flows have been reversed as people are pleased something has not happened in the Iraq election."
By 0830 GMT the dollar was up slightly on the day against the euro at $1.3022 , in the middle of recent ranges. Against the yen it was also higher at 103.54.
DATA WEEK
The gap between U.S. interest rates and those of higher yielding currencies, one factor behind the dollar's three-year decline, has been shrinking as the Fed sticks to its pledge of raising interest rates in a "measured" pace.
But Fed officials have hinted in recent weeks the pace of rate hikes could accelerate if necessary to combat inflation.
A survey on manufacturing activity in the Chicago area is due on Monday at 1500 GMT. This is followed by a poll on the broad U.S. manufacturing industry due on Tuesday, where some people expect a strong component on employment.
Friday brings U.S. non-farm payrolls -- data which have rocked the market over the past year.
"This week's data will boost the story on the employment side for the dollar," Myers said.
President George W. Bush's State of the Union speech will also be watched closely for any outline of steps to curb a large and growing budget deficit.
"Real money and even hedge funds are taking a wait and see stance," said Osamu Takashima, chief forex analyst at Bank of Tokyo-Mitsubishi. "We still need to see if the recent dollar-buying trend will continue on expectations that the U.S. will more aggressively tackle its deficit problems."
Growing trade and budget deficits have been key factors behind a decline in the dollar, which has lost 34 percent in the past three years against the euro and 22 percent versus the yen.