The euro slipped on Monday, testing a 22-month trough against the British pound, after weak German industrial data highlighted the divergent economic prospects between the euro zone and those of its biggest trading partners.
German industrial output fell 1.8 percent on the month in May, its biggest drop in more than two years, surprising most analysts, who had forecast an unchanged reading.
The weak data kept alive expectations that the European Central Bank may need to loosen monetary policy further in coming months in the face of disinflationary pressures and subdued economic growth.
ECB policymaker Benoit Coeure said at the weekend that rates will remain very low for a long time, regardless of developments in the rest of the world.
In contrast, the Bank of England is expected to tighten policy either before the end of this year or early next year.
Investors have also brought forward their view on the timing of the first rate hike by the U.S. Federal Reserve to mid-2015 after a stellar jobs report last week.
That helped the dollar index trade near its highest in nearly two weeks, near 80.36. The euro was down slightly around $1.36, having fallen near $1.36 earlier in the European session, its lowest since July 26. It fell to a 22-month low against the pound after the German data, but recovered to trade above 79 pence.
Most traders are cautious about adding to long dollar bets, aware that Fed policymakers will probably err on the side of caution or wait for wage inflation to pick up before hiking interest rates.
Fed minutes in focus
Fed minutes, due to be released later this week, should shed more light on how the debate within the rate-setting committee is shaping up, traders said.
The dollar's failure to make much headway has been the big disappointment on currency markets this year. Most traders say that unless yields rise sharply, the dollar, which has a good correlation to U.S. yields, is unlikely to push much higher.
The dollar fell against the below 102 yen, after having risen 0.7 percent last week. The euro also shed 0.2 percent to trade above 138 yen with falling stock markets offering the safe-haven yen some support.
Sterling, however, slipped against the dollar to $1.71, off last week's six-year high near $1.72. The Canadian dollar, also in favor at the moment, stood above C$1.06 per USD, just off a six-month high struck on Thursday.
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