The dollar fell broadly on Monday after weaker-than-expected Bank of America profits damped investors' initial optimism that companies may escape the pinch of the crisis in global credit markets.
Bank of America , the No. 2 U.S. bank, reported a fall in its first-quarter profit due to write-downs and rising credit losses.
Its net income fell to $1.21 billion, or 23 cents per share.
Analysts said BoA's results suggested that the fallout from the credit crisis may not be over as some have speculated, chilling risk appetite as such problems were expected to continue weighing on the U.S. economy and the dollar.
In Europe, hawkish European Central Bank inflation rhetoric supported the euro after Governing Council member Klaus Liebscher said there was no reason for pessimism on euro zone growth.
"Bank of America's results obviously don't help the dollar, but the comments by the ECB earlier today were very hawkish and it clearly indicates the bank is very concerned about inflation and will avoid cutting rates," said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto.
The euro was higher against the dollar, inching toward a record high of $1.5983 hit last week, according to Reuters data.
The single euro zone currency was supported by a growing view that the ECB is in no hurry to cut interest rates from 4.0 percent for now due to nagging inflation risks.
The U.S. currency also came under selling pressure as investors continued to fret about the inflationary effect of oil prices, which hit a record high of $117.40 a barrel.
The greenback slipped to a session low of 102.99 against the yen and it fell more than 0.5 percent against a basket of six major currencies to 71.554.
Results on Friday from Citigroup , the largest U.S. bank, showed less damage from the credit market crisis than some had expected, with write-downs of $6 billion contrasting with market rumors of write-downs approaching $22 billion.
This had sparked dollar buying late last week as some speculated that the worst of the credit crunch may have passed.
But having seen several "false dawns" in the credit crisis, investors were reluctant to place too much faith in the banking results as marking the beginning of the end for the squeeze.
Sterling also fell, with markets unimpressed by a Bank of England offer to swap government bonds worth 50 billion pounds for banks' riskier mortgage debt to help them navigate through the credit squeeze, as the amount was known before the announcement.
Despite a tentative pickup in risk appetite from last week's banking results and Royal Bank of Scotland, Britain's second-biggest bank, confirming it is considering a rights issue, UK markets had been on tenterhooks over the BoE plan to help ease strains in British mortgage markets.
The pound extended losses in reaction to the news, pushing the euro up versus the UK currency, not far from a record high near 81 pence hit last week.
The UK currency fell against the dollar.
"The plan didn't offer any massive surprises. ... Sterling has had a good run over the last few days on the news and so it's a bit of the 'buy the rumor, sell the fact,"' said Daragh Maher, senior currency strategist at Calyon.