The dollar edged up against major currencies on Tuesday, but kept to tight ranges versus the euro, ahead of a possible rise in U.S. interest rates and a meeting of Group of Seven industrialized nations later in the week.The yen lost some ground on waning expectations for a revaluation of the Chinese yuan after a G7 source told on Monday the meeting is not looking for an abrupt change in China's currency policy.
"Positions are square now and people are sitting back and waiting for the events later this week," said Paul Mackel, currency strategist at ABN AMRO in London.
"The China comments affected the yen but in general there is more trading in crosses than euro/dollar."
At 6 a.m. EST, the dollar fetched 103.78 yen, up 0.14 percent from late U.S. trade on Monday. The yen also lost ground against the euro to stand at 135.27 yen.
The greenback was little changed against the euro at $1.3022 but rose half a percent against the Australian dollar after the Australian unit reeled from worse-than-expected trade data.
The market paid little attention to news that euro zone manufacturing activity grew in January at its fastest pace in three months as global demand raised exports.
A survey for the NTC Research Eurozone PMI showed a rise for the second month running to 51.9 from 51.4 in December. That pulled the index further above the 50 level that divides growth from contraction and beat the consensus forecast of 51.7.
Sterling was also jolted slightly lower against the dollar and euro by weaker-than-expected UK manufacturing data.
END-OF-WEEK RISK
Wednesday's decision on interest rates by the U.S. Federal Reserve is widely expected to produce another quarter percentage point hike in the fed funds rate.
But traders will be looking for any signs that the central bank could accelerate its campaign of "measured" monetary tightening in coming months.
"The bias is for further tightening and this should support the dollar," said Koji Fukaya, chief manager of research at Bank of Tokyo-Mitsubishi in Tokyo.
If the Fed raises rates to 2.5 percent as expected, that would lift returns on U.S. deposits further above those in the euro zone. The European Central Bank is expected to leave rates unchanged at 2.0 percent in a policy meeting this week.
Also on Wednesday, investors will watch President Bush's State of the Union speech for any outline of steps to curb a large and growing budget deficit.
Any sign of aggressive measures to curb the fiscal deficit would likely support the U.S. currency, analysts say.
CHINA TALK WANES
Dealers said that in the short term the yen could come under mild pressure on receding expectations that China will soon relax the peg of its currency to the dollar, a move that would likely buoy Asian currencies.
The Japanese currency shot up to a five-year high of 101.65 yen versus the dollar in mid-January on speculation that such a move was imminent.
The Group of Seven economic powers does not expect China to announce any change to its currency regime at this week's talks in London and is not looking for an abrupt change in policy, a European G7 source said late on Monday.
An official from Japan's Finance Ministry said on Tuesday that China should move toward a flexible exchange regime soon, but the market brushed off the comments.
With U.S. employment data sandwiched between the Fed meeting and the G7 meeting, which runs from Friday many traders are expected to stand on the sidelines to see how the week pans out.
"The FX market continues to sleepwalk toward the minefield," Halifax Bank of Scotland said in a note to clients.