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Dollar's advance vs euro stalls after strong gains

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The dollar paused in its advance against the euro on Monday after two days of strong gains, with a further rise seen depending on whether U.S. bond yields keep rising amid an intensifying debate on when the Federal Reserve might scale back its stimulus.

But a U.S. government holiday on Monday kept many investors on the sidelines and volumes low. While the euro managed to retrace some of its recent losses, analysts cautioned against reading too much into Monday's trading.

"It's a very quiet day with more of a relief bounce" in the euro, said David Song, Currency Analyst at Daily in New York. "I think the euro could be in line for another move lower from here.''

The euro climbed to $1.3403 on lower-than-usual volumes, but gains were capped as investors began to sell it from around $1.3400 through to $1.3410. The euro hit a two-month low of $1.3295 last Thursday after the European Central Bank shocked the market with a surprise cut of its main interest rate to a record low 0.25 percent.

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The euro zone currency was last trading up 0.3 percent at $1.3402. Against the Japanese yen, the dollar gained 0.2 percent to 99.23 yen.

"The dollar has come off slightly, but the defining factor is the rise in the U.S. yields," said Jeremy Stretch, head of currency strategy at CIBC World Markets in London. "The dollar will be supported and for the euro any bounce toward $1.34 will be sold into."

The dollar index dipped 0.2 percent to 81.11, after having set a two-month high at 81.482 after a report on Friday showed U.S. employers added 204,000 new jobs last month, well above the 125,000 new jobs forecast.

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