The dollar traded with a firm bias on Monday as investors positioned for another US interest rate rise and breathed a sigh of relief that Sunday's historic election in Iraq had passed with only sporadic violence. A US interest rate decision on Wednesday, US jobs data on Friday and a weekend meeting of Group of Seven policymakers combine to make the coming week one of the most important in the market for months.
The dollar made early headway against the Swiss franc as investors unwound safe-haven trades put on ahead of Sunday's Iraqi poll. More than eight million Iraqis cast their ballots, confounding predictions that threats of violence would keep them at home.
"The dollar is firmer today, largely on relief that the Iraqi election went relatively smoothly," said Steve Pearson, chief currency strategist at HBOS.
The Federal Reserve is widely expected to raise interest rates by a quarter-point to 2.5 percent on Wednesday. This would lift returns on US deposits further above those in the euro zone, where rates are expected to remain at 2.0 percent for most of the year.
After pushing broadly higher in early European trade, the dollar pared gains to stand at $1.3035 per euro and 103.42 yen by 1245 GMT, little changed on the day.
Higher interest rates bolster the appeal of dollar deposits and have helped offset the negative impact on the US currency from the United States' huge trade and budget deficits.
So far the US central bank has raised rates in quarter-point increments, but several Fed officials have hinted the pace of rate hikes could accelerate if necessary to combat inflation.
"This is a significant week for the dollar. The Fed's statement will maintain the 'measured' language but there is a real risk the Fed could raise rates faster, probably 50 basis points in March," said Adam Myers, foreign exchange strategist at Societe Generale.
So far this year, the dollar has gained around 4 percent against the euro and 1 percent against the yen.
A survey on manufacturing activity in the Chicago area is due on Monday at 1500 GMT. This is followed by a poll on the broad US manufacturing industry due on Tuesday, where some people expect a strong component on employment.
President George W. Bush's State of the Union speech on Wednesday will be closely watched for any proposals to curb the country's growing budget deficit.
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