The dollar rose toward this week's highs against the euro and the yen on Friday as investors speculated an upcoming U.S. central bank meeting could hint at interest rates climbing at a faster pace.
Markets have already priced in a quarter-point rise in U.S. rates next Tuesday and attention will focus on whether the Federal Reserve's post-meeting report indicates it is willing to take more aggressive action in coming months.
After heavy selling in the past month, the dollar has steadied this week, helped by figures showing foreign buying of U.S. assets has been more than enough to cover the United States' huge trade deficit.
"There is a sense that the dollar's sell-off has moved very far very quickly and a lot of dollar-positive cyclical numbers have been ignored," said Daragh Maher, currency strategist at Calyon.
The dollar -- which fell to two-month lows against the euro and six week lows against the yen last week -- rose almost half a percent against both currencies to stand at $1.3312 per euro and 104.92 yen by 6 a.m. EST.
The Swiss franc continued to suffer after Switzerland's central bank left interest rates unchanged on Thursday and signaled it was in no rush to tighten policy while the country's economic recovery remain fragile.
The Swiss franc was down more than half a percent against the dollar, extending losses from the previous session.
OPPOSING FORCES
The dollar has yo-yoed this year between optimism about the U.S. economy and the upward path of U.S. interest rates, and pessimism over the United States' ability to finance its record current account deficit.
Such pessimism eased this week after data showed net capital inflows into the United States surged to $91.5 billion in January, the second biggest inflow on record and more than enough to finance the nation's current account deficit.
Rising U.S. rates are likely to bring back some of the funds that have poured into assets that have boomed this year, including stocks in other countries and commodities.
"The market is expecting 25 basis points and will get it on Tuesday, but there is a significant risk there will be a change in the statement to be more hawkish," said Geoff Kendrick, currency strategist at Westpac.
The Fed has raised rates by a quarter percentage point at six straight meetings, taking the key U.S. rate to 2.5 percent.
Some in the market expect U.S. rates to rise as high as 4 percent by the year-end, though the pace of increases might be tempered by Fed chief Alan Greenspan's desire to sail a steady ship before his term ends next January.
Greenspan is due to speak at noon EST, though he is not expected to comment on the economy or interest rates so near to the policy meeting.
Some traders said the dollar was being supported by speculators unwinding dollar-funded carry trades, in which they borrowed the dollar to buy high-yielding assets in other countries.
Emerging market currencies such as the Polish zloty, Turkish lira and South African rand have fallen in recent sessions, slipping off multi-year peaks hit earlier this month.