The dollar slid against most currencies, while the yen dropped to its lowest in nearly four weeks versus the greenback on Monday as better-than-expected manufacturing data from Europe and Japan lifted risk sentiment and prompted investors to seek assets with higher returns.
The data overall painted a picture of a more stable global economy and provided relief to some of the risky assets that have recently sold off due to the prospect of reduced stimulus measures from the Federal Reserve.
The manufacturing reports out of the euro zone, Japan, and the UK all showed improvement, lifting the euro and other riskier currencies such as the Australian and New Zealand dollars.
There were also encouraging signs out of the debt-burdened peripheral countries in Europe such as Spain and Italy. U.S. manufacturing data in June was also solid with a reading of 50.9, slightly higher than expected, although the employment index fell to 48.7.
(Read More: US Manufacturing Expands, Construction Spending Up)
"The (U.S.) data is not that strong that it changes the Fed equation meaningfully, other than it fits with the U.S. manufacturing sector stabilizing after a soft patch, and works with the idea of reduced downside risks," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
Data from the euro zone showed the manufacturing purchasing managers' index hit a 16-month high, suggesting a downturn in the sector was easing. British manufacturing, meanwhile, grew at its fastest pace in more than two years, while sentiment among Japan's manufacturers improved markedly.
In late afternoon New York trading, the dollar was up 0.5 percent at 99.58 yen after hitting a peak of 99.68, its highest since June 5.
(Read More: Dollar to Face Stiff Resistance on Its Way Up: Chart)
Expectations the Bank of Japan will continue with aggressive monetary easing also weighed on the yen, with the euro up 0.8 percent at 129.93 yen, having earlier hit a near three-week peak of 130.11 yen.
The euro was up 0.4 percent at $1.3064, recovering after a dip last week to $1.2983, its lowest since early June. But it stayed below chart resistance at $1.3106, the 100-day moving average, and the 200-day average at $1.3074. Against the Japanese currency, it traded up 0.9 percent at 130.08 yen.
The dollar index, which measures the dollar's value against a basket of major currencies, was last down 0.2 percent at 83.013, having hit a four-week peak of 83.344 on Friday.
Friday's U.S. payrolls report will be key. A strong reading would boost the dollar by fanning speculation about an early paring-back of the Fed's $85-billion-a-month bond-buying.
An improving domestic economy should give the U.S. currency a big advantage over the euro and yen.
In contrast to the Fed, the European Central Bank is likely to emphasize at its monthly meeting on Thursday that the euro zone economy still needs help.
The Bank of England and the Reserve Bank of Australia also hold policy meetings this week.