Dollar shuffles in ranges ahead of Fed, G7

The dollar stuck to tight ranges on Tuesday ahead of a Federal Reserve interest rate decision and a gathering of Group of Seven finance ministers and central bankers late in the week. The market has already factored in a quarter percentage point rise in the fed funds rate on Wednesday, and traders will be looking for any signs that the central bank could accelerate its campaign of "measured" monetary tightening in coming months.
"I don't think the Fed is all that concerned about inflation at this point so its statement is not likely to change," said Koji Fukaya, chief manager of research at Bank of Tokyo-Mitsubishi.
"But the bias is for further tightening and this should support the dollar."
If the Fed raises rates to 2.5 percent as expected, that would lift returns on US 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.
The dollar was at around 103.70 yen, flat from late US trade on Monday.
It was down slightly at around $1.3055 per euro after notching up a gain of almost four percent against the single European currency in January - the biggest monthly gain since May 2001.
With US employment data sandwiched between the Fed meeting and the G7 meeting, which runs from Friday to Saturday, many traders are expected to stand on the sidelines to see how the week pans out.
"There are so many big events this week it's very difficult to judge which way the market will move," said Toshiaki Kimura, chief forex manager at Mitsubishi Trust and Banking Corporation.
President George W. Bush's State of the Union speech on Wednesday will also be watched closely 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 US currency, analysts say.
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 101.67 yen versus the dollar in mid-January on speculation that such a move was imminent.
The G7 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 on Monday.