A 1.88-percent rally in the Dow Jones industrial average on Monday despitevirtually universal expectations that the Fed would raise interest ratesthis week reflected the attractiveness of investment in U.S. Assets,particularly with the euro staying dogged by confidence problems, analystssaid.

"For now, the flow of funds is dollar positive against both the euro and theyen," said Gerard Lyons, global head of treasury research at StandardChartered Bank in London.

"The key is U.S. Assets -- whether they start to lose shine," he added. "Thekey issue is when corporate profit expectations are revised down, but itwill require more than a one off U.S. Rate hike."

So long as asset markets are not harmed, higher U.S.Interest rates wouldincrease returns on dollar deposits, which are already higher than those oneuro or yen deposits.

The U.S. Federal Open Market Committee, the Fed's policy-making arm, was tostart a two-day meeting later on Tuesday, with most of the market expectinga quarter point increase in the 5.5-percent Fed funds target. Some tradersexpect a half point rate hike. In early European trading, the euro dipped towithin a whisker of Monday's record lows around $0.9665 -- more than 17percent below where the single currency began trading a year ago. Againstthe yen, the dollar also rose toward Monday's 107.51 peak, its highest sincemid-October.

A flurry of European purchasing managers surveys showing continued expansionin manufacturing activity region-wide gave only limited support to the euroas the headline purchasing managers indices came in below expectationsacross the board, due in part to the fallout from Y2K factors. Euro zone PMIfell to 55.6 in January, well below a consensus forecast for a record 57.7reading, from 57.4 in December. It was the first drop in the PMI sinceDecember 1998.

"I don'T think European economic data had been an issue for the euro lately,but they certainly are mediocre," said a dealer at a Japanese bank inLondon. Although the rise in the prices component of the PMI surveys addedto the case for a European Central Bank credit tightening at Thursday'spolicy meeting, the market was not giving as much respect to the ECB as itdid to the Fed, traders said. Whereas the ECB was likely to encounter somecriticism whatever the outcome of its meeting, most people had a firm beliefthat Fed Chairman Alan Greenspan would engineer a soft landing for theU.S. Economy, said Michael Rottmann, currency strategist at HypoVereins bankin Munich.

"If there is no change in that positive picture, then the dollar in generalhas a relatively positive sentiment," Rottmann said. Further weighing on theeuro was concern about strained political environment in Europe, highlightedby a potential Austrian government coalition headed by the far right and bythe scandal surrounding Germany's Christian Democratic Union Party. Tradingin the yen was relatively quiet, with the currency now about five percentbelow the multi-year highs near 100 yen it had traded at the end of lastyear.

Earlier in the day, senior Japanese Finance Ministry official Takatoshi Itosaid the ministry was satisfied with dollar/yen's direction after Group ofSeven meeting on January 22, at which finance ministers and central bankchiefs from the industrial powers reiterated their concern over a higheryen.