The dollar weakened across the board on Monday, failing to sustain last week's gains as investors saw few prospects for a U.S. rate hike, while the euro and other currencies linked to rising interest rates strengthened.
The euro hit a record high against the low-yielding yen and sterling while the high-yield Australian and New Zealand dollars also hit fresh multi-month peaks.
A tumble of more than 8% in China's benchmark equity index only provided a brief respite for the yen, unlike in February, when a sell-off in the Shanghai bourse boosted the Japanese currency and sparked slides in global stock markets.
Instead, "interest rate differentials and high-yield currencies versus low-yielders remain the broad themes for foreign exchange trading," said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York.
"The dollar failed to sustain gains from last week based on the assessment we are still very far from a situation of rate hikes in the U.S., while rates are still going up elsewhere."
U.S. data on Friday that showed the economy added 157,000 jobs in May did reduce expectations for the Federal Reserve to cut interest rates from 5.25% this year, but market sentiment has yet to swing back toward expecting a rate hike.
The euro was up , off Friday's eight-week low at $1.3391. The dollar was also down against the yen .
The euro earlier hit 164.36 yen, a lifetime high, according to electronic platform EBS, and last traded .
A report showing a smaller-than-expected 0.3% gain in U.S. factory orders in April had little impact on currency prices.
Rate Decisions Ahead
The European Central Bank meets Wednesday and is expected to raise its benchmark rate 25 basis points to 4.00% and possibly signal further increases.
In addition to the ECB, central banks in Britain, Australia and New Zealand will also make rate announcements this week. All three are expected to maintain the status quo, but analysts see an outside chance of hikes from the Reserve Bank of New Zealand and the Bank of England.
"Risk appetite remains fairly strong, supporting carry trades. The ECB meeting this week should indicate that the ECB has a lot more to do (on rate increases) while the economy in Japan is sluggish," said Niels From, currency strategist at Dresdner Kleinwort.
But some analysts said that after raising rates this week, the ECB may be inclined to pause for a while to access the impact of its tighter monetary policy on the economy.
That could leave the dollar poised for a corrective rally.
"I wouldn't be surprised to see more neutral ECB language this week, and if U.S. data continues to hold up, we could see the euro fall to the $1.30-$1.31 area over the coming weeks," said Shaun Osborne, senior currency strategist at TD Securities in Toronto.
The Aussie dollar has risen recently to a 15-year peak against the low-yielding yen and the kiwi to a 17-year high .
The Canadian dollar continued a steady ascent against its U.S. counterpart, boosted by high energy prices and solid Canadian growth figures.
"Currencies like the Australian and New Zealand dollar, as well as the Canadian dollar, are basically on fire," said Brian Taylor, a senior currency trader at M&T Bank in Buffalo, New York. "Demand for them is not going to slow anytime soon."