The U.S. dollar edged off three-year highs against major currencies on Monday but looked poised to resume gains after last week's strong U.S. jobs data boosted expectations the Federal Reserve will scale back stimulus soon.
Expectations the U.S. economic recovery is leading the rest of the world and that the Fed will reduce its bond-buying have sparked a nearly 5 percent rally in the dollar since mid-June, prompting some traders to say the move had been too fast.
Focus is shifting to Wednesday's release of the minutes from the Fed's June policy meeting. A Reuters poll of firms that deal directly with the Fed now sees the reduction beginning in September.
(Read More: Job Growth Posts Large Gain in June; Rate Holds)
In contrast, the European Central Bank and the Bank of England were more likely to ease monetary policy, while the Bank of Japan was expected to continue with aggressive stimulus, which will keep the euro, sterling and yen weak.
"The minutes from the June 18-19 FOMC meeting will likely be hawkish, as they have been for some time, relative to the Fed statements," said Stephen Jen, a managing partner at London-based hedge fund SLJ Macro Partners.
"Our conviction is strong that the dollar will embark on a structural ascent, against a broad range of currencies."
The dollar index, which measures the value of the greenback versus a basket of six major currencies, fell 0.3 percent at 84.204, having earlier hit 84.588, its strongest since July 2010.
The index had rallied 1.5 percent on Friday after data showed U.S. employers added 195,000 new jobs to their payrolls in June, while job increases for the previous two months were revised higher.
The euro rose 0.3 percent to $1.2872, but not far from a seven-week trough of $1.2805 plumbed on Friday.
German data showed exports in May fell the most since late 2009, suggesting Europe's largest economy is struggling to regain traction, although a rise in imports pointed to robust domestic demand.
The euro's gains accelerated after European Central Bank President Mario Draghi, in comments to the European Parliament's Economic and Monetary Affairs committee, that "euro area economic activity should stabilize and recover over the course of the year, although at a subdued pace."
Analysts said the euro would find it tough to make any significant gains against the dollar as Draghi pledged to keep interest rates low for an extended period.
The divergence between the United States and other major economies is clear in bond markets, with 10-year Treasury yields spiking 23 basis points on Friday to around 2.75 percent, highs last seen in August 2011. The spread between Treasury and bund yields gapped to the widest since 2006.
(Read More: Goldman Sachs: Treasury Yields Will Hit 4%)
"The dollar's strength over the course of last week was especially swift. I think the speed was overdone and so this setback is normal," said Ulrich Leuchtmann, head of FX research at Commerzbank. "Now markets are positioned to take profits from these moves, but this is simply a pause."
"It looks like we will have a clearer diversion, with growth gaining momentum in the U.S. and the euro zone bumping along the bottom," said Niels Christensen, currency strategist at Nordea.
"I expect interest rate differentials to continue to move in favor of the dollar and to pull euro/dollar lower."
The dollar was last down 0.2 percent at 100.99 yen, having earlier hit a 1 1/2-month peak of 101.53 yen.