The dollar traded with a firm bias on Monday as investors positioned for another U.S. interest rate rise and breathed a sigh of relief that Sunday's historic election in Iraq had passed with only sporadic violence.
A U.S. interest rate decision on Wednesday, U.S. jobs data on Friday and a weekend meeting of Group of Seven policymakers combine to make the coming week one of the most important in the market for months.
The dollar made early headway against the Swiss franc as investors unwound safe-haven trades put on ahead of Sunday's Iraqi poll. More than eight million Iraqis cast their ballots, confounding predictions that threats of violence would keep them at home.
"The dollar is firmer today, largely on relief that the Iraqi election went relatively smoothly," said Steve Pearson, chief currency strategist at HBOS.
The Federal Reserve is widely expected to raise interest rates by a quarter-point to 2.5 percent on Wednesday. This would lift returns on U.S. deposits further above those in the euro zone, where rates are expected to remain at 2.0 percent for most of the year.
After pushing broadly higher in early European trade, the dollar pared gains to stand at $1.3035 per euro and 103.42 yen by 1245 GMT, little changed on the day.
INTEREST RATE POINTERS
Higher interest rates bolster the appeal of dollar deposits and have helped offset the negative impact on the U.S. currency from the United States' huge trade and budget deficits.
So far the U.S. central bank has raised rates in quarter-point increments, but several Fed officials have hinted the pace of rate hikes could accelerate if necessary to combat inflation.
"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.
So far this year, the dollar has gained around 4 percent against the euro and 1 percent against the yen.
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.
President George W. Bush's State of the Union speech on Wednesday will be closely watched for any proposals to curb the country's growing budget deficit.
Friday's payrolls release will also provide vital clues on the health of the U.S. recovery and the pace at which the Federal Reserve is likely to raise interest rates over the course of the year.
WAITING FOR G7
Asian currencies, including the South Korean won , were slightly weaker against the dollar after Chinese officials said at the weekend the country was in no rush to reform its pegged exchange rate.
U.S. and European officials have been urging China to let its yuan currency strengthen to help balance global growth and resolve the massive U.S. current account deficit.
Huang Ju, China's vice premier in charge of financial and banking issues, told a gathering in Davos, Switzerland, that China needs to clean up its banking system and open up its capital markets before acting on exchange rates.
His comments dashed expectations for a breakthrough on currency issues at this weekend G7 finance ministers' meeting in London.
Any revaluation of the Chinese yuan would be expected to put upward pressure on other Asian currencies due to close trade links in the region.