The dollar weakened against major currencies on Monday in volatile trading as investors grew nervous about the outlook for the US economy and interest rates.
The US currency, however, strengthened against emerging market currencies, led by gains against the Brazilian real, with emerging market assets heavily sold across the board amid waning risk appetite.
As a result, investors sought the safety of US government debt, as the yield on the benchmark 10-year Treasury note briefly dipped below 5 percent on Monday.
"We have some systemic uncertainty in the markets," said Jason Bonanca, senior currency strategist and director of FX strategy at Credit Suisse in New York.
He also noted the uncertain outlook for the dollar, with higher US inflation and markets at a loss as to how high interest rates would go.
"On top of that we have a new guy (at the Federal Reserve) that does not reassure us," said Bonanca, referring to Fed Chairman Ben Bernanke.
Analysts say that given the surge in US inflation expectations, the Fed's willingness to preempt inflation remained in doubt. On the other hand, the European Central Bank and the Bank of Japan are making aggressively hawkish moves even in the face of strengthening local currencies.
In late afternoon trading, the euro rose to $1.286te on Friday. Despite the dollar's fall, and the euro's encouraging gain, the euro zone currency has not decisively broken out from its recent trading range, analysts say.
"We don't have an especially strong view on the euro's near term direction, but with the euro nearer the upper end of its trading range, we have a slight bias to sell on rallies," said analysts from Brown Brothers Harriman in a research note.
Against the yen, the dollar fell 0.2 percent to 111.43 yen, well below the two-week high of 112.93 touched during European trade.
In the face of growing risk aversion, the Swiss franc gained sharply, pushing the dollar down 1 percent at 1.2041 francs, and euro weaker by 0.3 percent to 1.5491 francs. Sterling, meanwhile, firmed 0.5 percent to $1.8862.
Analysts said Monday's dollar losses were a resumption of the currency's generalised weak trend in recent weeks.
"The risk aversion story makes sense overnight, when I look at the euro move from the highs at $1.2770 to $1.2695. But eventually those risk-aversion trades get overwhelmed by more macro themes," he said, referring to the US current account deficit, a perennial dark cloud on the dollar's horizon.
Offsetting the dollar's losses against major currencies were gains against emerging market currency units.
The Brazilian real fell to a four-month low of 2.29 per dollar, losing 3.7 percent - its biggest one-day loss in three years - as the price action reflected ongoing turmoil in emerging markets.
The dollar was also sharply higher against the Mexican peso, trading up nearly 0.8 percent at 11.27 pesos.
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