The dollar crawled higher on Monday on expectations for higher US interest rates after an upcoming Federal Reserve meeting, but movement was restricted as the market eyed a slate of big economic events this week. Asian currencies including the Korean won came under mild pressure after weekend comments from Chinese officials attending the World Economic Forum in Davos, Switzerland, that Beijing would not rush to reform its pegged exchange rate regime.
But the yen barely moved on the latest comments, which came ahead of a meeting of the Group of Seven economic powers on Friday and Saturday, at which the yuan peg is expected to be a key topic.
"People are still looking for something to happen or some kind of guiding comments on Chinese forex policy to come out of the G7," said Luke Waddington, head of forex trading at Royal Bank of Scotland in Tokyo. "But we've had so many comments come out on the yuan and the market's waiting to hear something more substantial."
Asian currencies are expected to rise in unison when China relaxes the peg of its currency to the dollar - a move that some expect as early as the next few months.
US Treasury Under-secretary John Taylor said on Friday in Davos that the G7 was unlikely to make major changes to its stance on foreign exchange when it meets in London.
The dollar was at around 103.55 yen, up from 103.28 in late US trade on Friday.
The euro was slightly down at around $1.3025. It traded at around 134.80 yen compared with 134.65.
Dealers said the dollar had gained support from relief that a historic election in Iraq the previous day had gone without a major hitch. It was also benefiting from the prospect of rising interest rates ahead of the Fed's meeting on Tuesday and Wednesday, at which the central bank is expected to lift its funds rate by 25 basis points to 2.5 percent in its sixth rise since June.
In contrast, the Reserve Bank of Australia and the European Central Bank are both expected to leave rates on hold in policy meetings this week, at 5.25 percent and 2.0 percent respectively.
The gap between US yields and those of higher yielding currencies like the Australian dollar could shrink in coming months if the Fed presses ahead with its campaign of "measured" rate rises to combat the risk of rising inflation.
Ahead of the G7, a barrage of US data including the Chicago purchasing managers index, ISM factory report and non-farm payrolls will land.
President George W. Bush's State of the Union speech will also be watched closely for any outline of steps to curb a large and growing budget deficit.
"Real money and even hedge funds are taking a wait and see stance," said Osamu Takashima, chief forex analyst at Bank of Tokyo-Mitsubishi. "We still need to see if the recent dollar-buying trend will continue on expectations that the US will more aggressively tackle its deficit problems."
Growing trade and budget deficits have been key factors behind a decline in the dollar, which has lost 34 percent in the past three years against the euro and 22 percent versus the yen.
With so many factors ahead that could alter the market trend, implied volatility on short-dated foreign exchange options was up sharply on Monday, said Denis Copin, director at Societe Generale's currency options department in Tokyo.
One-week dollar/yen implied volatility stood at around 11.6 percent, its highest level since early January.