The dollar fell against the euro on Monday following its best week against the single currency in nearly 15 months, as U.S. stocks recovered a bit from the dramatic selloff that saw the 's sharpest decline in more than two years.
The selloff across asset classes forced investors betting against the U.S. currency to unwind their positions. The dollar also benefited as nervous investors bought the relative safety of some U.S. assets.
Speculators' net short U.S. dollar bets declined for the first time in six weeks, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday. On Monday, the dollar's rally came to an end as the euro staged a comeback. But not all analysts were convinced that Monday's decline would erase last week's gains.
Markets are still in a tug of war between directional bias for the dollar and the outlook for risk appetite.
"Obviously, equity markets stabilized a bit into the North American session, but the dollar is starting to stage a little bit of a comeback," said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.
Appetite for risk-taking crept back into currency markets to the detriment of the U.S. currency - it also helped higher-yielding emerging market currencies as well as commodity-linked currencies like the and .
The index that tracks the dollar against a basket of currencies was down 0.25 percent at 90.21, erasing some of the gains last week.
European shares rallied on Monday after Asian markets had found a semblance of calm.
The euro was up 0.38 percent from Friday's close at $1.228, after earlier hitting a day's high of $1.2296. The euro suffered its worst week since November 2016 last week and remains almost three cents off its three year high of $1.2538 hit in January.
The moves in foreign exchange markets were far more muted than in other asset classes last week, but analysts said volatility had risen. Commerzbank said worries about U.S. inflation returning were reflected in rising exchange rate volatilities options markets.
Analysts at the bank said that inflation concerns were unlikely to disappear quickly, and that investors should get used to FX volatility "remaining at higher levels for now or even rising further."
The dollar fell 0.14 percent from its last close to 108.63 , remaining above Friday's trough of 108.05 yen, its lowest level since Sept. 11.
The dollar last week fell nearly 1.3 percent against the yen.