The US dollar is under pressure from profit taking this morning, as investors pause to reassess the likelihood of a near term interest rate hike in the United States. The dollar rallied late last week as better-than-expected U.S. employment data led some traders to bet the Federal Reserve could raise benchmark U.S. interest rates by late 2009 or early 2010. The dollar rally has subsided as a lack of major economic data or events left traders with few reasons to push the dollar higher.

Today, analysts said markets were getting ahead of themselves, adding the U.S. economy still faces considerable headwinds that will make raising interest rates difficult.

The dollar's move in the past few sessions suggested that monetary policy issues may become a driver of currency movements in the near future, after market participants have focused on risk appetite for much of the year.

The Japanese yen continues to trade in a narrow range, taking cues for the USD. As the dollar weakens the yen strengthens and vice versa, within a tight margin.

The euro extended gains against the dollar, as stock futures rose and investors questioned whether the U.S. economy is strong enough to justify higher interest rates by year-end. The euro was able to reverse losses suffered after an unexpected fall in German industrial output; a drop of 1.9% month-on-month in April.

Some in the market state that if Latvia does not have to devalue its currency to deal with extreme economic weakness, which will provide some support to the euro.

The Sterling recovered from steep falls on Monday which sent it to a two-week low against the dollar with traders breathing a sigh of relief as the political storm engulfing UK Prime Minister Gordon Brown appears to have calmed for now. Signs of stabilization in the UK housing market fanned renewed optimism that the economy may be over the worst, helping to support a climb higher against the dollar and the euro

Investors brushed off a survey by the British Retail Consortium showing UK like-for-like retail sales fell 0.8% in May compared with a year ago, particularly as this followed a 4.6% jump in April.

The Canadian dollar soared versus the greenback this morning, underpinned by rising oil prices and firmness in global equities.

With crude oil prices rising above $70 a barrel, hitting a new seven-month high, the loonie should remain well supported in these ranges.

The strength extends the Canadian dollar's rise against the greenback that was boosted by domestic housing starts data, in a sign of optimism about economic recovery.

Meanwhile, the Australian dollar bounced off its lowest level in more than a week today, but weaker Asian stock markets tempered its gains and put a brake on its three-month long rally. Although there are no convincing bear signals suggesting the Aussie's uptrend of the last three months is over, some traders said its bull run was not sustainable. For now, technical signals suggest the Aussie's uptrend is still in place. Local data showing Australia 's economy is relatively resilient should encourage optimists too.

The New Zealand dollar slipped, amid uncertainty over what the central bank will do with interest rates at a review later this week, while a ratings downgrade for Ireland reduced appetites for riskier currencies.

The kiwi has risen almost 255 over the past three months.

Traders said investors were reducing kiwi positions ahead the Reserve Bank of New Zealand 's rate review on Thursday as opinion was split on whether the bank will cut rates or stay on hold.

EUR/USD 1.4023

USD/JPY 97.40

GBP/USD 1.6282

USD/CAD 1.0984

USD/MXN 13.3841

USD/CHF 1.0809

AUD/USD 0.7997

NZD/USD 0.6272

USD/DKK 5.3090

USD/SEK 7.6939

USD/NOK 6.3370

USD/TWD 32.80

USD/CNY 6.8347

10-Year Treasury Note Yield : 3.8444%

Dow Jones Industrial Average : 8,757.84 -6.65