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Dollar Holds Gains as Attention Turns to U.S.- China Talks

The dollar traded near six-week highs against the euro and a three-month peak versus the yen as traders continued to pare back expectations of a Federal Reserve interest rate cut this year.

Unexpectedly resilient U.S. economic data has prompted investors to scale back the implied chances of a Fed easing this year to around 70% from 100% at the beginning of the year.

"Some of the early signs for Q2 US GDP look better than Q1, so for now, there is a pause in US dollar selling," said Avery Shenfeld, senior economist at CIBC World Markets in Toronto.

Investors focused on the first day of a two-day meeting between U.S. Treasury Secretary Henry Paulson and China Vice Premier Wu Yi in Washington.

In early remarks, Paulson warned the Chinese delegation that Washington was growing increasingly impatient for Beijing to speed up policy changes that would help narrow the record
U.S. trade deficit.

The United States argues that an undervalued yuan currency gives China an unfair trade advantage and is a key driver of the deficit.

The euro was , well below a record peak above $1.3680 touched last month. It fell as far as $1.3436 on electronic trading system EBS on Monday, the lowest since early April.

Against the Swiss franc, the dollar slipped to , after a report quoted Swiss National Bank President Jean-Pierre Roth saying the central bank must be "particularly vigilant" on the inflation risk posed by the franc.

The euro, which on Monday rose to its highest since August 1998 against the franc, tumbled to an intraday low of 1.6534, before trading back up to .

Stretched Euro

The euro has fallen more than two cents from its record high against the greenback as speculators trim back bets on a further strengthening in the euro zone currency, which had swelled to a record high last week by one industry measure.

In fact, euro long positions have become so extended that even an unexpectedly strong reading in the ZEW survey of German investors sentiment, which rose to an eight-month high in
April, failed to give the currency a boost today.

"We continue to see the euro as stretched at current levels, and remain cautious on chasing the currency higher," strategists at UBS wrote in a note to clients.

Against the Japanese yen, the dollar was flat on the day , within sight of a three-month high of 121.63 hit on Monday.

Meanwhile, the Canadian dollar, the biggest gainer in recent sessions, was down , not far off a 29-1/2-year high. The Canadian currency has rallied for almost three months, driven by solid commodities prices, robust economic data and acquisitions of Canadian companies.

The U.S.-China meetings will be closely watched for any signs China is willing to let its currency strengthen more rapidly after last week's widening of the yuan's daily trading band against the dollar to 0.5% from 0.3%.

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