But this isn't any old week. All eyes will be on Tuesday's meeting of the Federal Open Market Committee. Although it's not entirely considered a done deal, the Fed is widely expected to announce a quarter-percentage-point increase in its target federal-funds rate at that meeting.

Whatever the outcome, the reaction of US stock and bond markets to the announcement will be key for foreign-exchange markets. This may depend on the language of the statement, including whether the Fed elects to alter its current neutral stance, analysts say.

An improvement in US asset markets -- which remain under pressure, despite a recent rebound -- could improve sentiment toward the dollar. Traders aren't holding out much hope, though.

"I would like to be optimistic that on the back of a 25-basis-point hike, the markets will breathe easy and there will bethis beautiful, calming statement from the Fed as to why they did it, quashing all further concerns about inflation in the year ahead ... but I really don't expect any big bounce-back in the dollar," said Hillel Waxman, chief dealer at Bank Leumi in New York.

One of the biggest concerns for the dollar is a widening US trade deficit, which was announced last week to have reached a record $24.62 billion in June. That news briefly drove the dollar down to 110.68 yen Thursday, its lowest level since Jan. 12, and pushed the euro back above $1.0600.

The dollar later rebounded against the yen, partly because of concerns that Japanese and U.S. officials might consider intervening to weaken the Japanese currency. But the euro, which also rebounded from recent ows against the yen, remained well bid at the end of last week.

Late Friday in New York, the dollar was trading at 111.36 yen, down from 111.63 yen late Thursday and from 115.82 yen a week earlier. The euro was trading at $1.0673, up from $1.0638 onThursday, but down from $1.0759 the preceding Friday.

The euro was also trading at 118.87 yen Friday, up from 118.60 yen Thursday. Sterling changed hands at $1.6130, down from $1.6175. A wider trade deficit is a problem for the dollar because it implies a wider current-account deficit, which must be financed with inflows of capital from overseas.

Either US interest rates need to go higher to attract those funds or the dollar must weaken to boost export competitiveness and improve the trade balance. A deterioration in the U.S. balance of trade also poses political problems for US policy makers, as it can feed protectionist sentiment. It has fueled speculation in some quarters that the US treasury may abandon its "strong dollar policy" in the interests of supporting exporters.

The Wall Street Journal