The dollar appears poised to advance on its rivals this week as investors focus on a U.S. economy that is outpacing the euro zone and Japan. The dollar could rack up especially large gains if Friday's U.S. monthly employment report comes in better than expected. The labor market is seen as the key piece in the puzzle over when the Federal Reserve will increase U.S. interest rates.

"The focus will be very much on how the economic data [play] out," said Vassili Serebriakov, a foreign-exchange strategist at Wells Fargo in New York. "Stronger numbers will influence rate expectations going forward." Also bolstering the dollar's prospects is continued concern over festering sovereign-debt problems in the euro zone. Investors are worried a severe fiscal crisis in Greece could spread to Portugal or even Spain. Those concerns, especially in contrast to an improving U.S. economy, sent the euro last Friday to its lowest level in more than six months against the dollar.

After falling below $1.39 Friday, the euro could sink this week as far as $1.36, according to Citigroup technical analysts. The dollar should trade this week between 89.75 yen and 92 yen, according to Andrew Chaveriat, a foreign-exchange strategist at BNP Paribas in New York.

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 Australia’s dollar traded near its lowest in more than a month as speculation the global economic recovery may slow prompted traders to pare expectations of an interest-rate increase when the central bank meets tomorrow. New Zealand’s currency was near its lowest level since Dec. 23 after an index of commodity export growth slowed in January and as concern over Greece’s budget problems damped demand for higher-yielding assets.

The odds that the Reserve Bank of Australia will increase its benchmark rate to 4 percent at its next meeting fell to 71 percent from 78 percent on Jan. 28, according to a Credit Suisse Group AG index based on swaps. “Markets are getting very nervous about the whole growth recovery story with the problems associated with Greece’s fiscal issues refusing to go away,” said Khoon Goh, senior economist at ANZ National Bank Ltd. in Wellington. “Market pricing has been pared back with a lot of people nervous about whether or not the RBA will pause.”

Australia’s dollar fell 0.1 percent to 88.26 U.S. cents as of 4:28 p.m. in Sydney after touching 87.89 cents, the least since Dec. 24. The currency slid to 79.54 yen from 79.78. New Zealand’s dollar bought 70.09 U.S. cents after earlier falling as low as 69.98 cents, the weakest since Dec. 23, and from 70.10 cents in New York. It fetched 63.19 yen from 63.28.

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The Australian dollar closed almost one cent lower as investors shied away from the local currency on European debt fears and rumours the Australian central bank will keep rates on hold. At 1700 AEDT, the Australian dollar was trading at $US0.8891/95, down 1.3 per cent from Thursday's close of $US0.9009/13.

Between 0700 AEDT and 1700 AEDT on Friday, the local unit traded between $US0.8887 and $US0.8967. It was the lowest close for the Australian dollar since January 4. RBC Capital Markets senior economist Su Lin Ong said the local unit came under pressure for much of the day due to the "whole global risk aversion trade".

"The ongoing concerns about Greece, lingering concerns about China ... you can see all risk barometers are under pressure," she said. "Everything from equities to barometers like the Aussie dollar."Fears Greece will default on its debt has raised concerns about the high level of indebtedness in other European nations such as Portugal.

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The rupee has witnessed a marginal depreciation of 3.4 per cent against the US dollar during.

The July-December period as compared to 15.7 per cent in the corresponding period of 2008-09.

Thus broadly exhibiting stability of the exchange rate with improvement in macroeconomic fundamentals,” the State Bank observed in a statement issued here on Tuesday. However most of the currency market experts were worried over the recent wave of depreciation of the rupee. In the open market, the local currency slipped to Rs86.25 to a dollar on Tuesday.

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A new Great Depression has been avoided. Gargantuan efforts from governments and monetary authorities have limited the damage of the credit crisis to a bad recession. But the world’s political and business leaders can’t spend too much time on the ski slopes at the World Economic Forum in Davos, Switzerland, this week. It’s time for them to build a consensus for higher interest rates.

There are too many signs of financial excess for anyone to relax. Chinese real estate, commodity prices and credit spreads are all worrying. Wall Street is overflowing with excess again. Bankers are making fortunes despite best efforts to rein in bonuses. And why not? When the bubble popped, all the borrowing that propelled asset prices to new highs hardly declined. It just moved from the private sector to governments.

If asset prices keep rising, they can just as easily fall suddenly. A renewed recession or a sudden loss of confidence in some doubtful currency or country could restart the downward spiral of losses and reduced lending.

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While the weakening in production prices may ease consumer inflation downstream, the data haven't altered the near term outlook with many economists expecting Wednesday's consumer price index to remain high and affirm interest rates will again need to be tightened by the Reserve Bank of Australia at its monthly policy meeting next week.

An index of final Australian producer prices fell 0.4% in the fourth quarter of 2009 from the third quarter and fell 1.5% from a year earlier, a record low, the Australian Bureau of Statistics said Monday.

Economists had expected quarterly PPI to have risen 0.2%, and to have fallen by 0.75% on year.

Cooling price pressures at the factory gate was a fall in imported inflation, helped by the buoyant currency, with the cost of manufacturing electronic equipment and refining petroleum declining most.

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The yen rallied against all of its major counterparts for a second week as President Barack Obama’s proposal to rein in banks and China’s possible increase in interest rates discouraged demand for higher-yielding assets.

The dollar fell to a one-month low against the yen before next week’s Federal Reserve meeting on speculation the White House’s plan to curtail risk will reduce investment in the U.S. The euro posted its biggest drop in five weeks against the dollar on concern Greece will struggle to contain its budget deficit within the European Union’s limits.

“The Obama bank risk-taking measures place a dark cloud over the U.S. recovery, which makes the environment quite dollar-negative, and the yen rallies,” said David Tien, a money manager in New York at Fischer Francis Trees & Watts, which manages $19 billion in assets. “The China news was certainly alarming.”

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The euro fell to a fresh five-month low against the dollar in Asia Thursday after China's strong economic data heightened speculation Beijing may take further steps to cool its economy, possibly weighing on global equities, commodities and other risk-sensitive assets like the common currency.

Short-term players sold the euro after data showed China's gross domestic product expanded 8.7% in 2009, beating market expectations for 8.5% growth. Separate data showed the country's consumer price index was up 1.9% from a year earlier in December, exceeding expectations for a 1.7% rise and underscoring inflation concerns.

The selling drove the euro down to $1.4067, its lowest level since August 17 last year. Concern that Chinese authorities may take the most recent data as a cue to tighten monetary policy further could continue to weigh on the euro and other commodity-linked currencies like the Australian dollar, dealers said. Thursday's indicators came a day after China's banking regulator said it will rein in new lending this year.

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Providing more flexibility to exporters and importers to hedge their risks against volatility in exchange rates, the financial sector regulators have allowed exchange-traded currency futures in the euro, the pound and the yen pairing with the rupee. Currently, currency futures are allowed only in the dollar-rupee contracts.

Market regulator Sebi and the Reserve Bank came out with separate circulars to permit currency futures in three more pairs. It will be now up to the stock exchanges to decide on the launch date. “It has now been decided to permit eligible stock exchanges to introduce currency futures on euro-INR (Indian rupee), pound sterling-INR and yen-INR,” Sebi said in a circular. The RBI also said the bourses are permitted to offer currency futures contracts in the three pairs in addition to the US dollar-rupee contracts.

Jamal Mecklai, CEO, Mecklai Financial, said, “It is excellent news that the RBI is actively pushing the development of the currency futures markets by permitting trading in other currency pairs; I look forward to the next obvious step, which is permitting trade in USD/INR options.”

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The Bank of Canada will probably keep its benchmark interest rate at a record low today, and repeat a pledge to leave it unchanged through June as an appreciating currency threatens to hamper the economic recovery.

The target rate for overnight loans between commercial banks will remain at 0.25 percent, where it’s been since April, according to all 26 economists surveyed by Bloomberg. The decision will be announced at 9 a.m. New York time.

“Any suggestion they will raise rates before the U.S. would probably drive up the currency, and we’ve already had concern from the bank that the very high dollar would derail the recovery,” said Pedro Antunes, director of economic forecasting at the Conference Board of Canada in Ottawa. “They will be hesitant to make any changes” today, he said.

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