The dollar continued its slow drift higher as expectations that the US Fed will pause from hiking interest rates faded further. Divyang Shah at Ideaglobal.com said the market has overplayed the Fed pause debate. "Concerns over inflation and inflation risks means that Katrina will eventually be seen as nothing more than a blip in the current tightening cycle," he added. Against this backdrop there may be still value in bidding for the dollar at current levels, especially as the currency is going to become more attractive as US interest rates increase. Simon Derrick at Bank of New York said the dollar's rise reflects "both the view that the FOMC will stick to its policy of measured tightening through the remainder of this year as well as a growing positive view about the outlook for the economy in 2006." Indeed, comments from a number of US rate setters, among them Michael Moskow and Janet Yellen, have been on the hawkish side. "It will take some very poor numbers for the Fed to take a pass on a September hike," analysts at CALYON pointed out in a research note. The week starts off quietly for US data but hots up later on and markets will use the numbers to gauge the impact of Hurricane Katrina on the US economy. "This will mean that releases such as the Philly Fed, Empire surveys and jobless claims take on more relevance than the usually more influential retail sales and inflation data," CALYON analysts said. In Europe, opinion polls showing that Angela Merkel, the challenger for the German chancellorshop, may not have enough support to form a centre-right coalition, also weighed on the euro. If a wider coalition comes about, the new government will have hard time pushing through much needed structural reform. German elections are to be held on Sept 18. Over in Japan, the landslide victory for premier Junichiro Koizumi's Liberal Democratic Party helped prop up the yen, although the currency has already lost some of its early gains. Additionally, there was more good news for the yen after data showing that the Japanese economy grew an upwardly revised 0.8 pct in real terms in the second quarter compared with the initial estimate of a 0.3 pct increase. The pound, meanwhile, edged lower after data out this morning showed slower than expected rises in raw material costs for producers. "Overall, the lower-than-expected headline PPI might provide a bit of support to short-sterling and give this morning's retreat in the pound a little more impetus," said Daragh Maher at CALYON. "But with the more directly relevant CPI and retail sales data still due later this week, the impact should be fleeting," he added. The office for National Statistics revealed that input prices, on a seasonally adjusted basis, rose by 0.2 pct in August from July, down sharply from July's steep rise of 2.5 pct, which was revised upwards from the provisional estimate of 1.8 pct. On an annual basis, input prices rose by 12.7 pct in August, again down on July's upwardly revised increase of 14.0 pct. The figures are well below analysts' expectations for a month-on-month rise of 2.1 pct and an annual increase of 14.1 pct.