Dollar rally stalls as US stocks extend gains

NEW YORK: The dollar fell against the euro on Monday following its best week against the single currency in nearly 15 months, as US stocks recouped some losses from the dramatic selloff that saw the S&P 500's sharpest decline in more than two years.

The selloff across asset classes forced investors betting against the US currency to unwind their positions. The dollar also benefited as nervous investors bought the relative safety of some US assets.

Speculators' net short US 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.

"At the start of the year the dollar was broadly on the defensive and most foreign currencies were doing fairly well and those trends reemerged today. I think that's one of the reasons the euro/dollar exchange rate is doing ok," said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York.

Even if the dollar has some room to extend last week's rally, analysts agreed that it didn't change the overall downward trend of the currency.

"The US fundamentals are better and justify at least a stabilization of the dollar, although I would call it a bear market correction," 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 US currency. It also helped higher-yielding emerging market currencies as well as commodity-linked currencies like the Australian and Canadian dollars.

The index that tracks the dollar against a basket of currencies was down 0.28 percent at 90.189, erasing some of the gains last week.

The euro was up 0.25 percent from Friday's close at $1.2284, after earlier hitting a day's high of $1.2296.

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 US 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 0.09 percent from its last close to 108.69 yen, 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.