The euro flirted with two-week lows against the dollar on Monday after Italian Prime Minister Mario Monti offered to resign, raising political uncertainty over who will lead the euro zone's third-biggest economy. The single currency was also undermined by the prospect of a recession in Germany and expectations of a future rate cut by the European Central Bank.
"If Monti's pro-euro stance is to back off, that should raise concerns about the euro," said Junya Tanase, chief currency strategist at J.P. Morgan Chase in Tokyo. The euro fell as much as about 0.3 percent to $1.2880 near a two-week trough of $1.2876 set Friday. It last stood at $1.2908, down about 0.2 percent from late US levels, with focus now on the Italian bond market reaction to the news.
Against the British pound, the euro also hit a three-week low of 79.865 pence. The euro also came under pressure after Germany's central bank on Friday warned the euro zone's biggest economy could soon enter recession. Comments from a European Central Bank policymaker on Friday that an interest rate cut was possible next year if the euro zone economy does not pick up also weighed on the common currency.
The US dollar index rose 0.2 percent to 80.45, near two-week high of 80.658 hit just after the release of the payroll data on Friday. Many economists think the Fed will announce on Wednesday monthly bond purchases of $45 billion, signalling it will continue to pump money into the US economy during 2013 in a bid to bring down unemployment. "Despite a drop in the unemployment rate, we expect the Fed to convert the expiring Operation Twist programme into an outright purchase programme, with a purchase distribution similar to the current program," Barclays Capital analysts wrote in a note.
Against the yen, the dollar was steady at 82.48 yen but its failure on Friday to break above last month's high of 82.84 yen after the strong job data could suggest the US currency is susceptible to a fall in the near term, some analysts said. The Canadian dollar hit a seven-week high against the US dollar, which fell to as low as C$0.9865, as the Canadian unit extended its gains following strong Canadian job data and the government's approval of take-over of energy company Nexen by China's oil giant CNOOC.
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