The dollar paused on Monday after a three-week rebound against other major currencies as traders await a series of key events including meetings of the Federal Reserve and the Group of Seven (G7), both early next month. Some traders said the US currency, which has rallied around 4 percent against the euro and the Swiss franc this year, could reverse course and head back down as prospects of higher US interest rates have now been mostly factored in.
"The rebound that has taken place this year seems to have peaked. I think the dollar will weaken at least until the FOMC," said Yoshiharu Yanagisawa, head of forex trading at State Street in Tokyo, referring to the Fed meeting on February 1-2.
"The market has already factored in a rise in US rates, but if the Fed signals they are going to raise it at a faster pace then it could support the dollar," he said, though adding that chance of such a move appeared slim.
The euro was fetching around $1.3053 barely changed from its level in late Friday trade in New York, where the single European currency rose around 0.6 percent in its first advance against the dollar in seven trading days.
Against the Japanese currency, the dollar was at 102.98 yen up 0.19 percent on the day.
The dollar was flat against the Swiss franc at $1.1855. In addition to the Fed's meeting, which is expected to raise rates by 25 basis points, traders said the market was focusing on the G7 finance ministers' meeting on February 4-5 to see if they would increase pressure on China to revalue its currency.
It is widely thought that a higher yuan, now virtually pegged at 8.28 per dollar, would trigger a rally in other Asian currencies including the yen.
A poll of 93 market participants in Japan, including both Japanese and foreign investors, jointly conducted by Reuters and Jiji news agency and released on Monday, produced a median forecast of 95 yen as the likely low point for the dollar this year before rebounding in the second half.
"The dollar's real effective exchange rate has already declined to levels seen during its across-the-board selloff in 1995, and we think its downtrend has entered the final stage," said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.
"Even though the dollar may drop below 100 yen, that's going to be temporary. Basically, we are expecting a reversal in 2005," he said, adding that he believed the Japanese government would resume large-scale yen-selling intervention and the Bank of Japan would further ease monetary policy if the yen spiked up.
The dollar suffered a wide sell-off in 2004, falling 4.5 percent against the yen and about 7.5 percent versus the euro, as the market focused on the growing US current account and budget deficits.
Highlighting such worries, nearly 40 central banks have increased their exposure to the euro in the past two years, mainly at the expense of the dollar, according to a survey of 65 central banks by Central Banking Publications released on Monday.
Technically, some traders said the dollar may find it harder to rise this week, given Friday's data from the Commodity Futures Trading Commission that showed speculators in the Chicago futures market held their smallest net short dollar positions in almost four months last week.
Dealers say much of the dollar's gains this year have been fuelled by covering of short positions, which are effectively bets that a currency will weaken, and that such purchases were expected to slow now that most of the positions have been covered.
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