The dollar touched an 18-month peak against the euro on Monday before paring gains as some investors bought euros on expectations the dollar may struggle to advance further in the coming week.
Although the dollar has rallied in recent days on expectations of higher US interest rates, a series of technical obstacles is expected to slow a further rise in the US currency this week, analysts said.
The euro had fallen as low as $1.1776, the lowest since mid-May 2004, dragged down by its losses against the yen. The single currency was at $1.1808, down 0.1 percent from the prior New York session.
In the absence of first-tier US economic data, traders initially followed the bearish euro trend of the past three sessions until firm support at the $1.1759 level came into view, they said.
"There has not been a whole lot of economic news and there is demand for euros below $1.18 from the Middle East," said Andrew Busch, global foreign exchange strategist with Harris Nesbitt in Chicago. "People are buying back a little bit."
A trader cited talk of large triggers on barrier options worth 3 billion euros at $1.1750 that would likely be defended. However, euro price charts showed a lack of technical support below $1.1759 until around $1.1590.
"The market is trying to feel its way down and see if there's any support," said Steven Englander, chief North American foreign exchange strategist with Barclays Capital.
"Traders have been rebuffed a couple of times, but there's a confidence in the market that we're in a dollar-positive environment," Englander added.
The dollar backed away fairly quickly from its highs against the yen after traders booked profits on the greenback's six consecutive sessions of gains against the Japanese currency. Some analysts recommended caution before diving in to sell dollars wholesale against the yen.
"We suggest watching and waiting until a clear 'top' has formed, possibly an extremely dramatic one, before re-selling," said technical analysts at Mizuho Corporate Bank.
"Chart levels at current prices are not clearly defined, which in itself may add to current instability," they said. The dollar was last around 117.61 yen, down 0.5 percent from Friday on profit-taking after climbing as high as 118.38 yen, its highest since August 2003.
The euro was buying around 138.90 yen, down about 0.6 percent.
Despite the dollar's softness against the yen on Monday, until the Federal Reserve signals an imminent pause in its rate increases and the cost of borrowing in Europe and Japan starts rising, prospects for even higher US rates will keep buoying the dollar, traders and analysts said.
Traders also noted talk of dollar buying driven by US multinational companies repatriating dollar-denominated profits under the Homeland Investment Act. Those dollar inflows are expected to keep up through the end of the year.
That in turn will keep pressure on the euro.
"Surely it does not look like this euro has any upside momentum whatsoever. There is inherent pressure on this euro," said Manfred Wolf, director of foreign exchange at HVB Group.
The euro was also still smarting after European Central Bank President Jean-Claude Trichet gave little indication after a policy meeting last week that a change in euro-zone rates was in the cards.
During the European trading session, analysts noted the effect of riots in France on euro sentiment, although US traders said the developments were having a minimal impact on the market.
"Social unrest in Paris has become a euro drag, with the reform-oriented Interior Minister and President hopeful Sarkozy coming under pressure for mismanaging the situation," said analysts from BNP Paribas in a note to clients.
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