The dollar was flat against the euro on Monday as traders awaited any hint of increased inflation prospects from the Federal Reserve after its widely-expected decision on US interest rates on Tuesday.
The Fed will likely deliver its 10th straight quarter-point increase in its fed funds rate, taking it to 3.5 percent. But recently solid US economic data have some analysts wondering if the US central bank will sound a more hawkish note.
"Maybe some language will be tilted toward the Fed continuing their measured moves beyond 4 percent," said Tim Mazanec, senior currency strategist with Investors Bank and Trust in Boston.
The market currently anticipates US official rates to end the year at 4 percent or 4.25 percent, so hawkish language in the Fed's accompanying statement will increase the odds of rates continuing to rise in 2006, thereby providing renewed support for the dollar.
Higher interest rates tend to increase the allure of a currency since they offer investors a higher rate of return.
"The market will be looking for any indication of the vigor with which Alan Greenspan intends to raise rates," said Joe Quinlan, managing director and chief market strategist with Bank of America Capital Management.
"A lot of people used to think 3.50 percent was the neutral and now that that's off the table, is it 4.50 percent?" said Quinlan.
By late afternoon in New York, the euro traded flat compared with late on Friday, at $1.2350. For the past three sessions, the euro has attempted unsuccessfully to break significantly above resistance at $1.24. It remains near the top of its summer trading range.
Meanwhile, the yen slipped against the dollar, but was well off its intraday lows, and dropped to a 3-1/2-month low against the euro, owing to uncertainty produced by an upcoming snap election in Japan.
The dollar rose to 112.15 yen, up a quarter of a percent from late Friday. The euro pared earlier gains, but remained up 0.1 percent at 138.46 yen.
After losing a key vote on reform of the country's $3 trillion postal system, Japanese Prime Minister Junichiro Koizumi dissolved parliament's powerful lower house and called an election on September 11 in the hope of winning a fresh mandate for reform.
A political shake-up in Japan could unnerve foreign investors, who have bought nearly $100 billion worth of Japanese stocks and bonds this year, and undermine the yen. But Koizumi is betting that elections could purge his party of anti-reformers and allow him to go ahead with his slate of changes.
Meanwhile, sterling scored a one-month high against the dollar after data showed British raw material costs increased at the fastest annual rate in over 20 years in July.
The data raised speculation that the Bank of England would stay in a wait-and-see mode after ordering its first cut in interest rates for two years last week.
The pound climbed to $1.7850, up about 0.4 percent. It hit $1.7903 earlier in the session, its highest level since July 1.
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