The dollar steadied against the yen and the euro in thin trade on Monday, underpinned by its interest rate advantage and a view that profit-taking on the dollar's rally this year has run its course.
Data from the Chicago Commodity Futures Trading Commission showed on Friday that speculators in International Monetary Market futures slashed their net long dollar position by 80 percent in the week ending December 20.
Traders said the IMM data showed that profit-taking on the US currency's year-long rally and a squaring up of portfolios that pushed the dollar to its biggest one-week loss against the yen in six years earlier this month had ended.
The dollar index, which has gained more than 12 percent this year to date, is poised to post its first yearly gain in four years and its biggest rise since 1997.
Some investors see more gains next year.
"Even if the Fed stops raising rates, the US economy looks stronger than the euro zone or Japan, and the dollar's rate advantage will stay," said Yusuke Fujisawa, an international debt portfolio manager at Dai-Ichi Kangyo Asset Management in Tokyo.
The Federal Reserve's 18-month campaign of rate tightening has attracted overseas investors to high-yielding dollar deposits, helping break a three-year, 30-percent slide in the dollar due to worries about gaping trade deficits.
For more clues about the rate outlook, the market will scrutinise data on US existing home sales, regional manufacturing and consumer confidence due later this week, analysts said.
Trade was quiet on Monday as investors hesitated to buy or sell the dollar aggressively given a lack of fresh data and with markets in New York and London shut for Christmas holidays.
The dollar was buying 116.50 yen, up around 0.2 percent from its level in late US trade on Friday.
It slipped almost half a yen on Friday after a slide in new US home sales gave some investors an excuse to take profits on the dollar's sharp gains this year.
The euro was fetching $1.1850, down from $1.1865.
Traders said the market's next focus would be Japanese consumer prices data, due on Tuesday, which could provide clues on the timing of an end to the ultra-loose monetary policy that has kept Japanese rates pinned near zero for around five years.
Economists in a Reuters poll expect the core nation-wide consumer price index for November to show a rise of 0.1 percent from a year earlier, which would be the first upturn in prices since October 2003.
An upturn in the core CPI and an end to around 7 years of deflation has been the Bank of Japan's key prerequisite for finishing with its "quantitative" easing policy of flooding the banking system with cash.
Still, the central bank has emphasised that it will likely keep interest rates near zero for some time after normalising its monetary policy.
"We think the risks for the yen are tilted to the downside," said Tokyo-based strategists at J.P. Morgan Chase in a research note, arguing that a weak CPI number could raise further doubts about the timing of an end to zero rates.
The dollar has risen around 13 percent against the yen this year to date, on track to post its best annual gain against the Japanese currency since 1984.
It has climbed 14 percent versus the euro, its biggest rise since a 16 percent rally in 1999, when the single currency was launched.
The Fed raised its funds rate for the 13th straight time this month to 4.25 percent and is widely expected to bump it up again in January.
Meanwhile, euro zone rates are at 2.25 percent while rates in Japan are virtually at zero.