The dollar posted sharp losses on Monday, weighed down by investment banks' month-end selling and expectations the European Central Bank will raise euro zone interest rates this week.
At the end of each month, banks and corporates try to square up their accounts by selling currencies with extreme positions on their books.
"Overall, the market is extremely long dollars so people are trying to get out and just square up because it's the month-end and a lot of these investment banks are closing their accounts this week," said Rafael Martorell, chief dealer at BNP Paribas in New York.
The euro climbed above $1.19, its highest in three weeks, according to Reuters data, but traded back down to $1.1850 by late afternoon, still up more than 1 percent from late Friday.
The single currency had earlier dipped as low as $1.1681. Traders said the $1.1680 area has proved to be a tough support to breach in recent sessions, with a range of central banks said to be buyers of euros around that level.
Traders also bought euros in anticipation of the ECB rate decision on Thursday. The prospect of higher interest rates in the euro zone, currently at 2 percent, has boosted the allure of short-term euro-denominated debt. A rate increase would mark the ECB's first in five years.
"The ECB is expected to hike by 25 basis points on Thursday, and the market is probably going to price in another 25 basis points by the first quarter and another 25 that will take rates to 2.75 percent. That is giving more support to the euro," said BNP's Martorell.
By contrast, markets are starting to price in the end of the Federal Reserve's tightening cycle after somewhat dovish minutes of its November 1 meeting. Analysts suggest that US rate expectations may have topped out, with the implied yield curve on the June 06 future having declined by roughly 10 basis points in the past week.
Against the Japanese currency the dollar was down 0.7 percent at 118.78 yen having traded as high as 119.93 yen. Options-related selling ahead of the psychological 120-yen barrier and the euro's reversal capped dollar/yen.
The dollar was down more than 1 percent against the Swiss franc at 1.3045 francs, while sterling rose about 1 percent to $1.7305.
Also on Monday, the US Treasury declined to name China a currency manipulator, but said in its report on currency practices that it will keep pressuring Beijing for further foreign exchange flexibility. The report had little impact on the market partly because most New York traders had already left for the day.
Analysts said the dollar's early rally faded as it lacked momentum in the absence of major US data. The currency quickly turned around when stop-loss orders were triggered.
At the height of its rally earlier in the global session, the dollar hit 27-month and two-year highs against the yen and sterling, respectively.
The dollar's losses started after the release of soft US existing home sales data for October, which reflected the impact of higher US interest rates. The Fed has raised rates 12 consecutive times and is expected to tighten further in December and late January.
Later in the week, US economic data and the implications for Fed monetary policy are likely to exert more of a hold on traders' thinking.
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