The dollar fell versus the euro on Monday, snapping a three-day winning streak, as a jump in euro-zone annual inflation to a record high sealed the case for a European Central Bank interest rate hike next month.
Data showing a steeper-than-expected contraction in manufacturing in New York state and more hawkish talk from an ECB Governing Council member also weighed on the dollar, which rallied last week on hopes the Federal Reserve would start tightening monetary policy later this year to curb inflation.
"A fair amount of it is the higher euro-zone inflation. It it pretty much puts a lock on it (ECB rate hike), unless we hear something different from (ECB President Jean-Claude) Trichet," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
"I will say it's a done deal at this point. It looks like some of the dollar euphoria has worn off a little bit, but overall we are still in the lower half of the euro/dollar range," he added.
The euro rose to a session high of $1.5517, pushing further away from Friday's one-month low around $1.5300.
Euro-zone inflation rose to a new record high of 3.7 percent year-on-year in May, prompting hawkish comments from ECB Governing Council member Nout Wellink who said stabilizing inflation in the medium-term was a priority.
At the same time, U.S. economic data showed the New York Fed's "Empire State" general business conditions index fell to minus 8.68 from minus 3.23 in May, worse than market expectations for a reading of minus 2.00.
While an ECB interest rate increase appears certain, analysts doubt the Fed will follow Chairman Ben Bernanke's tough inflation talk with action because U.S. economic growth remains sluggish.
The Washington Post reported on Monday that Bernanke does not intend to raise interest rates because he is more worried that soaring oil prices will slow global growth rather than fire inflation.
A euro-zone rate hike would further diminish the appeal of dollar-denominated assets to investors who are seeking higher returns.
"It was a two-pronged reaction for the dollar. We have a weaker-than-expected New York Fed manufacturing data. Markets were hoping a little more stable number," said Steven Butler, director of foreign exchange trading at Scotia Capital in Toronto.
"And certainly, the inflation comment from the ECB also weighed on the dollar. That was not a surprise and that certainly added fuel to the fire," he said.
The euro climbed to a session high of 167.68 yen, its highest since October, according to Reuters data. It remained higher on the session.
The dollar surrendered early gains versus the yen, that had propelled it to a four-month high at 108.58 yen. It last traded down on the session.
Investment bank Lehman Brothers Holdings Inc posted a quarterly loss of $2.8 billion on Monday, matching its forecast, after recording massive trading and hedging losses.
The dollar was little moved by a report showing net overall capital inflows into the United State rose to $60.6 billion in April from a revised outflow in March of $48.7 billion, almost enough to cover the U.S. trade deficit in the same month.