The dollar rose against the euro and yen on Friday to its highest in a week as investors wagered the US currency's month-long slide might have gone too far and looked to a possible dollar-boosting interest rate hike next week. Markets have already priced in a quarter percentage point rise in US interest rates at the Federal Reserve's policy meeting next on Tuesday.
Attention will now focus on whether the statement accompanying the rate decision indicates the Fed is willing to take more aggressive action in coming months by removing the word "measured" when it refers to rate increases.
Rising US rates, which make dollar-denominated securities more attractive, may recapture some of the funds that have poured into assets in higher-yielding currencies. If the pace of Fed rate hikes were to quicken, the effects on the dollar would be unpredictable, some said.
If the Fed were to take out the "measured" language from its statement, that would signal it felt "the economy was a bit stronger than had been believed, that inflation might be a bit stronger, and would point to higher rates at a quicker pace," said Hugh Walsh, vice president of foreign exchange with Forties Bank in New York.
"From an interest rate differential standpoint, that is positive for the dollar. But higher rates might not be so good for the (US) stock market, so we could see some selling of (dollar-denominated) assets," Walsh added.
After heavy dollar selling in the past month, the currency has steadied this week, helped by figures showing foreign buying of US assets has been more than enough to cover the United States' huge trade deficit.
The dollar fell to two-month lows against the euro and six-week lows against the yen last week. Late afternoon in New York, the dollar was trading at 104.69 yen up 0.2 percent from late on Thursday.
The euro was trading at $1.3311, down 0.5 percent.
Against the Swiss franc the dollar was at 1.1646 francs, up 0.7 percent, after Switzerland's central bank left interest rates unchanged on Thursday and signalled it was in no rush to tighten policy while the country's economic recovery remain fragile.
Sterling was trading at $1.9196, down 0.2 percent. The Fed has raised official interest rates by a quarter percentage point at each of its last six monetary policy-setting meetings, taking the federal funds rate to 2.5 percent.
Wall Street economists expect the Fed to raise rates another quarter point at its policy meeting on Tuesday. Benchmark interest rates in the euro zone are 2 percent.
MODEST IMPACT: The dollar's three-year decline so far has had only a modest effect on the price of imported finished goods. Data last week showed the US trade gap widened to a near record $58.3 billion in January.
Higher petroleum prices pushed the cost of goods imported to the United States up 0.8 percent in February, slightly more than expected, a government report showed on Friday.
Wall Street analysts had forecast a 0.7 percent increase. The University of Michigan's mid-March reading on consumer confidence was 92.9, down from a final reading of 94.1 in February, whereas the median estimate of economists polled by Reuters looked for a reading of 95.
"The data seems to not matter much in the background of a refocus on the trade balance and the tug of war between what the Fed is going to do or not do," said Brian Taylor, chief dealer of foreign exchange trading, Manufacturers and Traders Bank in Buffalo, New York.
The dollar has swung this year between optimism about the US economy and the upward path of US interest rates and pessimism over the United States' ability to finance its record current account deficit.