LONDON (AFP) - The dollar eased slightly against the euro as dealers turned cautious ahead of an interest rate meeting of the US Federal Reserve, which was widely expected to raise borrowing costs.
The single European currency climbed to 1.2205 dollars from 1.2173 late on Monday in New York.
The dollar stood at 109.98 yen from 109.87 on Monday.
The US Federal Open Markets Committee was widely tipped to raise official borrowing costs by a quarter point to 1.75 percent at its meeting later Tuesday, while setting the scene for further rises in the months ahead.
"There is a clear consensus in the market that along with increasing the federal funds rate by 0.25 point to 1.75 percent, the FOMC statement will indicate continued optimism that the US economy is 'poised' to accelerate after an energy-price related 'soft spot' during the summer," said Derek Halpenny, economist at the Bank of Tokyo-Mitsubishi.
"The maintenance of the word 'measured' will be viewed by the financial markets as an indication that the FOMC remains determined to increase the federal funds rate to a more neutral level.
"This should help support the dollar, but probably only modestly given the clear consensus for this outcome," he predicted.
Most analysts agreed the Fed was likely to strike an optimistic tone in its statement, mirroring Fed chairman Alan Greenspan's view that the US economy is regaining traction.
"An upbeat statement that suggests that recent weaker data will not deflect the Fed from continuing along its incremental tightening path may just be enough to kick-start a modest dollar rally," said HBOS analyst Steve Pearson.
Sterling meanwhile was in focus after a survey by the Royal Institute of Chartered Surveyors said British house prices fell in August for the first time since June 2003. The news comes a day after data showed a slowdown in both mortgage lending and approvals.
The cooling housing market suggests that the Bank of England's five interest rate hikes since last November have started to take effect, analysts said.
The euro was changing hands at 1.2205 dollars against 1.2173 late on Monday in New York, 134.24 yen (133.74), 0.6833 pounds (0.6813) and 1.5474 Swiss francs (1.5476).
The dollar stood at 109.98 yen (109.87) and 1.2678 Swiss francs (1.2713).
The pound was at 1.7864 dollars (1.7857), 196.48 yen (196.14) and 2.2651 Swiss francs (2.2700).
On the London Bullion Market, the price of an ounce of gold stood at 405.25 dollars against 404.30 dollars on Monday afternoon.