The dollar held its ground on Monday, taking advantage of the ultra-thin volumes owing to U.S.
and UK market holidays to arrest its decline of the last three weeks and eke out slender gains against a basket of major currencies.
"This is only due to the iliquid markets," said Carole Laulhere, currency strategist at Societe Generale in Paris.
"The dollar should stay quite vulnerable this week. We still have record oil prices, which is negative for the dollar, and U.S. equity markets are worsening, which is also a concern for the greenback."
Crude oil has soared almost 40 percent so far this year -- over 17 percent in May alone -- to record levels above $135 a barrel. This is fanning fears over the ability of U.S. consumers and businesses to weather the credit- and housing market-led economic storm and prevent the economy from sliding into full-blown recession.
The dollar index hit a one-month low last Thursday, and the S&P 500 equity index posted its biggest one-week decline since early February.
Deteriorating equity markets and rampant oil prices -- which provide the backdrop for the latest euro zone consumer price inflation figures this week -- should be the focus for currency
investors this week, Laulhere said.
The dollar index was up a slender 0.1 percent on the day at 72.065, but still within sight of one-month lows of 71.823 struck last week.
The euro was down 0.1 percent from late U.S. trading on Friday but less than three cents from its all-time highs above $1.60 last month.
The dollar was also up 0.1 percent on the day against the Japanese yen at 103.45 yen.
A 2.3 percent fall in Tokyo stocks -- the steepest in six weeks -- had prompted investors to unwind yield-seeking carry trades, pushing the dollar to the day's low around 103.15 yen
before bids at 103 yen and just below provided solid support.
Inflation Data in Focus
There are no major economic data reports due for release on Monday. Financial markets in the United States and the UK are closed for Memorial Day and a bank holiday, respectively, although European markets are open.
Among the main data points this week will be the flash estimate for May euro zone CPI on Friday. A Reuters poll of economists points to an uptick in the annual inflation rate to 3.5 percent from 3.3 percent, well above the European Central Bank's target of close to but just below 2 percent.
Investors also await a raft of U.S. data and speeches from top Federal Reserve officials, including Chairman Ben Bernanke on Thursday, for more clues about the direction of interest
The personal consumption expenditures index for April is due on Friday. It includes the core PCE price index, which excludes food and energy costs and is one of the Fed's favourite measures
Other key economic reports due this week include the National Association of Purchasing Management-Chicago business barometer for May, and April new home sales.
The ECB's hawkish talk has seen markets shift dramatically in recent weeks to now fully price in a quarter point rate hike to 4.25 percent by October, BNP Paribas strategists noted.
While fed funds futures are almost fully pricing in a similar rate hike from the Fed by the end of the year to 2.25 percent, deteriorating economic conditions might prompt a rethink.
"The dollar is likely to trade on the soft side unless the market decides to unwind its risk-taking positions on heightened risk aversion," BNP Paribas said in a client note.