The euro retreated to a 10-day low against the dollar on Monday, as investors eyed a European Central Bank meeting later in the week that could pave the way for further stimulus to boost inflation in the euro zone.
Though most traders and analysts reckon the ECB will wait until its December meeting to announce anything new, they see a risk that additional easing measures could be flagged this Thursday and are betting ECB chief Mario Draghi will at least try to talk the currency down.
"Any dovish shift in the ECB's language will be seen as increasing the odds of more stimulus and likely send the euro broadly lower," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington.
The dollar has also been supported by some positive U.S. economic data last week such as the higher-than-expected consumer inflation and a four-decade low for initial weekly jobless claims. These reports gave some hope the Federal Reserve may actually raise interest rates this year, underpinning the U.S. currency.
Commonwealth's Esiner, however, said any sustained gain in the dollar "will come from a more defined increase in hopes for a December Fed rate hike." And that, he said, could come from a more hawkish Fed at next week's Federal Open Market Committee meeting or a solid uptick in payrolls for October and November.
The euro was 0.24 percent lower at $1.1320, trimming its losses from a session low of $1.1308, its weakest since Oct. 9. Against sterling, it fell to 73.18 pence after dropping to a 3-1/2-week low of 73.05 pence.
Many banks were expecting the euro to fall to parity with the dollar by the end of the year as the ECB pumps 60 billion euros into the economy each month. But since dipping below $1.05 in March, it has gained around 9 percent, adding to the deflationary pressures facing the euro zone.
The dollar index, meanwhile, on Monday rose 0.4 percent to 94.95.
After this week's ECB meeting, currency traders' focus will turn to the Fed, which holds its policy meeting next week. Most expect the Fed to keep rates at record lows, while investors are split over whether "lift-off" will come at December's meeting or in 2016.
Interest rate futures traders, however, are banking on the Fed raising rates in April next year, with a 55 percent chance, according to the CME Group FedWatch on Monday.