The dollar looks firm in the near term, some analysts believe as the interest rate differential between US and Europe is expected to attract more capital to the US. The Fed is believed to raise the benchmark Fed Funds rate charged for overnight loans to 2.5% compared to the analogous rate of the European Central Bank left unchanged at 2% in a policy meeting on Thursday.

"Regardless of whether the U.S. indicates a faster pace for rate rises or not, it is certain that the interest rate gap between the U.S. and the euro zone will steadily widen," said Mitsuru Yaguchi, senior economist at Mitsubishi Securities.

"The dollar should firm against the euro toward $1.29 by the end of March."

Now the markets that have already factored in a quarter-percent increase in the Fed funds rate are looking for indications that the Fed might change the “measured pace” of rate hikes to a more hawkish tempo. Traders will also be closely watching for any hints in Bush’s State of the Union address as to the steps to cut the US budget deficit, U.S. employment report for January, a speech on the U.S. current account by Fed Chairman Alan Greenspan, and discussions in the G7 meeting scheduled for Friday and Saturday.

The meeting of the seven industrialized nations will probably resist the urge of France and Germany to put more pressure on Asian countries to revaluate their currencies. After the euro has almost doubled against the yen in the past three years, the European powers have begun to urge the Asian governments to strengthen their currencies, abandoning their peg to the dollar. Especially China is pressurized to allow yuan to appreciate against the dollar.

``Nothing is going to change at the G-7,’’ said Callum Henderson, head of currency strategy at Standard Chartered Plc. ``There’s been a lot of pressure on Asia, but now the baton will be passed back to Europe. The euro will rise against the dollar.’’