Dollar gains before Fed, March rate cut seen less likely

That also contrasts to a weaker economic outlook for European countries, which is making the single currency relatively less attractive.

"The macro picture in the U.S. looks a lot better than the macro picture in European union countries and the eurozone in general," said Helen Given, FX trader at Monex USA in Washington.

The Fed is expected to hold rates steady on Wednesday and investors will focus on comments from Fed Chairman Jerome Powell, after he indicated in December that the Fed is pivoting to a rate cutting cycle.

"We'll probably see a bit of pushback on the last meeting," said Given. "I'd expect that a lot of the dollar strength that we're seeing today, and we should continue to see until that decision release on Wednesday, is coming from shifting expectations."

The dollar index, which measures the U.S. currency against six rivals, was last up 0.19% at 103.75 and remained close to the six-week high of 103.82 it touched last week. The is set for a 2.4% gain in January.

The dipped 0.39% to $1.08080.

The European Central Bank on Thursday held interest rates at a record-high 4% and reaffirmed its commitment to fighting even as the time to start easing borrowing costs approaches.

The next move will be an interest rate cut but policymakers speaking on Monday disagreed on the exact timing of the move or the trigger for action.

Traders are now fully pricing a move in April, with almost 150 basis points of easing priced in for the year.

Sterling was little changed on the day at $1.26780 ahead of the Bank of England's policy announcement on Thursday.

The greenback fell 0.18% to 147.88 yen, but the Japanese currency is on course for an almost 5% decline in January, its weakest monthly performance since June 2022, as traders temper their expectations of when the Bank of Japan would exit from its ultra-loose policy.

"Towards the end of December we saw positioning become net long JPY - perhaps fueled by expectations for both, aggressive Fed easing, as well as rapid BOJ policy normalization," said Sid Mathur, head of Asia macro strategy and emerging market research at BNP Paribas.

"But both those expectations have been scaled back over the past couple of weeks, and the BNPP positioning indicator suggests that those JPY longs have also been reduced."

Investors are also wary of growing geopolitical risks after three U.S. service members were killed in an aerial drone attack on U.S. forces in northeastern Jordan near the Syrian border.

Such uncertainties could provide the safe-haven yen with a temporary lift, analysts said.

In cryptocurrencies, Bitcoin was little changed on the day at $41,980.