In times of financial stress, however, investors sell those higher-yielding currencies and flock back to the euro and yen, with both benefiting from an unwinding of those carry trades.
"If the euro can hold above 1.1525 over the next day or so, it would be an extremely bullish signal for the pair," said London-based Craig Erlam, senior market analyst at OANDA.
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"Ordinarily, a daily close would be a sufficient sign, but this is no ordinary day. I would like to see how traders react to these levels in the absence of market panic."
The thinness of markets in the summer, when many traders take vacations, has also contributed to Monday's sharp moves.
In late trading, the euro jumped to $1.1714, its highest since mid-January. It last stood at $1.1594, up 1.8 percent, with its sustained rise in the past few weeks likely to cause unease within the European Central Bank.
The dollar dropped as low as 116.47 yen, its lowest in seven months, and last changed hands at 118.61, down 2.81 percent.
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Worries about a slowing Chinese economy, and in turn global growth and deflation, engulfed markets after a run of weak data from China in recent weeks, including Friday's survey showing a further deterioration in China's manufacturing activity.
Traders said the weakness in the dollar index reflected doubts whether the Fed will be able to raise interest rates next month. But without clear signals from the U.S. central bank so far, many commodity and emerging market currencies would continue to struggle against the greenback.
That gave credence to a view that while the dollar was likely to struggle against other major currencies, it would rise against those in emerging markets.
