The dollar firmed against the euro on Tuesday as it continued to draw support from a more positive U.S. economic outlook and a growing view the Federal Reserve may not cut interest rates later this month.

The minutes of the Fed's September meeting due at 2 p.m. EDT could provide clues on the likelihood and extent of any more easing.

Last Friday's solid report on U.S. job creation in September has eased worries about a possible recession and analysts are now warming to the view that the Fed may hold rates steady at its next meeting.

The market now sees about a 50 percent chance of a Fed rate cut on October 31, down from around 75 percent last Thursday, the day before the jobs report. This has helped the dollar recover from record lows versus the euro and a basket of currencies set at the start of last week.

It's just a moderate correction (in the dollar) following on from the big moves over the past couple of months and also from the payrolls last week which were a bit stronger, said Martin McMahon, FX strategist at Credit Suisse in Zurich.

So it's not all doom and gloom for the dollar.... but it is by no means any change in trends.

The dollar index, a gauge of the greenback's value against a basket of major currencies, edged up 0.2 percent to 78.831, above an all-time low around 77.660 struck last week.

However, the dollar fell 0.2 percent against the yen to 117.24 on selling by Japanese exporters returning from a three-day weekend. Japanese financial markets were closed on Monday for a national holiday.

The euro slipped 0.15 percent to $1.4038 by 6:22 a.m. EDT, about two and a half cents below last week's record peaks and showing little reaction to comments from European Central Bank President Jean-Claude Trichet to the European parliament.

Trichet reiterated that risks to inflation in the euro zone are to the upside, while risks to growth are on the downside and declined to be drawn into a debate on currencies.

EURO JAWBONING

Tuesday brought a fresh round of comments on the euro's strength from European politicians, with French trade minister Herve Novelli saying the strong currency is undeniably causing problems for the economy and Irish prime minister Bertie Ahern saying that the exchange rate is hurting competitiveness.

However, Daragh Maher, senior currency strategist at Calyon, said investors took some heart from the fact that euro zone finance ministers focused on urging China to allow greater appreciation of the tightly pegged yuan rather than on highlighting the rally in euro/dollar.

But there are still some concerns that the euro/dollar issue could feature at next week's Group of Seven meeting.

Markets ... are hesitating to push euro/dollar higher because they are concerned the G7 may come out with a statement supporting the dollar, said Niels Christensen, currency strategist at Nordea in Copenhagen.

That said, traders warned the dollar's gain may not be sustained for long as its upside momentum has slowed and key resistance levels are looming.

On fundamentals, most traders believe the dollar is still vulnerable to a downturn in the U.S. housing market despite a relatively strong jobs number.

Given a generally light data calendar, the spotlight is on the Fed minutes due at 2 p.m. EDT, which will detail the reasoning behind last month's 50 basis point rate cut to 4.75 percent.

If soft data appeared crucial it would seem that future cuts are off the agenda for now, especially given how the original August payroll figure of minus 4,000 was scratched out to show a 89,000 increase, Bear Stearns said in a research note.

Alternatively, if it is clear from the minutes that the Fed's main motivation was to respond to tighter credit conditions then the market might feel a bit more comfortable with not just the September rate cut but also the possibility of more to come in the future.

Credit Suisse