Despite dipping against the euro, the dollar looked firm in the near term as interest rate differentials between the euro zone and the United States widen and because US economic growth looks stronger than in Europe, some analysts said.
"Regardless of whether the US indicates a faster pace for rate rises or not, it is certain that the interest rate gap between the US and the euro zone will steadily widen," said Mitsuru Yaguchi, senior economist at Mitsubishi Securities.
"The dollar should firm against the euro towards $1.29 by the end of March."
The Fed is expected to raise interest rates to 2.5 percent while the European Central Bank is seen leaving rates unchanged at 2 percent at its policy meeting on Thursday.
The Fed statement is due after the meeting of the policy setting committee, the first of a series of closely watched events this week that includes US jobs data and a meeting of the Group of Seven (G7) economic powers.
The dollar was at around 103.75 yen, little changed from late US levels. The euro bought around $1.3075, up from $1.3046 but within the past week's range between 1.3035 and 1.31.
It also firmed to 135.65 yen from 135.30.
Traders said the strength in the single currency was partly due to buying of European bonds by Japanese investors.
US President George W. Bush's State of the Union speech is due later on Wednesday, with traders watching closely for any specific steps to curb a large and growing budget deficit.
On Friday, the market will brace for the US employment report for January and a speech on the US current account by Fed Chairman Alan Greenspan.
Capping the eventful week is the G7 meeting slated for Friday and Saturday, with traders focusing on what the G7 nations will talk about with China.
Waning expectations that China might relax the yuan peg to the dollar as earlier as the G7 meeting have helped reduced volatility in dollar/yen trading.