The dollar exited North American trade on Tuesday a touch softer against the euro as dealers awaited a deluge of US economic data that could shed light on the course of monetary policy.
The start of a Federal Reserve policy meeting expected to end on Wednesday with interest rates steady at 5.25 percent also kept the greenback in fairly tight ranges on the day. Strategists said investors were reluctant to take new positions before seeing the Fed's policy statement and parsing it for clues about future rate moves.
"There's definitely a 'let's wait and see what happens' attitude in the market right now," said Meg Browne, a currency strategist at Brown Brothers Harriman. The Fed has kept interest rates steady since August, but Browne said a shift to a more optimistic view on the US economy could spark dollar gains. "The market hasn't started to price in a rate hike this year, but it's tilting that way, and the main risk is the Fed could make it tilt even further," she said.
In late afternoon trading, the dollar was off 0.1 percent at 121.60 yen, still within reach of Monday's four-year peak of 122.19 yen. The euro was up 0.1 percent at $1.2965.
Positions in the dollar and euro are relatively small, according to J.P. Morgan's proprietary flows data, further suggesting big shifts are unlikely ahead of the first estimate of US fourth-quarter growth, also due on Wednesday. Comments from European officials on the weak yen injected a bit more volatility into cross currency pairs on Tuesday.
In the latest move, the euro fell sharply against the yen after German Finance Minister Peer Steinbrueck said the euro-yen exchange rate will be discussed at next week's meeting of G7 rich countries. The euro, having shed earlier gains on Steinbrueck's comments, ended flat at 157.65 yen, less than a yen away from a record high of 158.61 hit last week.
Negative sentiment continued to weigh on the yen and Swiss franc as carry trades in which investors borrow these low-yielding currencies to buy higher-yielding ones continued. The exception to the rule on Tuesday was the New Zealand dollar, the highest yielding among the world's most liquid currencies. It fell nearly 1 percent to US $0.6885 on a breakdown in technical support.
During the Asian trading session, a surprise 1.9 percent slide in Japanese household spending in December added to a run of tepid figures on consumption that had prompted the Bank of Japan to hold rates steady so far this month at 0.25 percent.
"The dollar-yen focus is still very much an interest rate story, with people taking out (expectations of) US rate declines and also removing some Japanese rate (hike) expectations in the short term," said Adrian Schmidt, currency strategist at RBS Financial Markets. Earlier on Tuesday, the dollar got little bounce from the US consumer confidence index that was in line with expectations.
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