The dollar held steady against the euro and the yen on Monday after a report showed growth in the US manufacturing sector slowed in March but prices paid rose more than expected. The report pointed to tepid growth in factory output and disappointed bulls looking for a repeat of Friday's Chicago PMI survey.
Which showed that Midwest manufacturing jumped to its highest early 2005 in the same month. But the Institute for Supply Management's prices paid index, which measures inflationary pressures in manufacturing, climbed to its highest since August, cushioning the blow for the dollar.
Upward pressure on inflation would likely lead the Federal Reserve to hold back from cutting interest rates from the current level of 5.25 percent any time soon.
"ISM is a bit disappointing after the large upside surprise in Chicago PMI, but the prices paid is sharply higher and this is going to save the dollar from a drubbing," said Brian Dolan, director of FX research at Forex.com in New York.
St. Louis Federal Reserve President William Poole said on Monday he would lean toward a further rate rise if inflation failed to ease and the economy was only moderately weak.
The ISM report was a preview for a number of big economic reports coming up this week, which will culminate on Friday with the US non-farm payrolls report, the most closely watched barometer of the health of the jobs market.
Late afternoon in New York, the euro was up 0.1 percent at $1.3370. The euro rose to a near two-year high just above $1.34 last week after Washington said it will impose duties on imports of coated paper from China, raising fears of an escalation in protectionism between the two countries.
Some analysts said the dollar could come under pressure later in the week if US payrolls data disappoints, and if the Bank of England raises interest rates on Thursday, a move that would highlight the dollar's diminishing yield advantage.
"Market players are looking for another catalyst to continue selling USDs," Michael Woolfolk, senior currency strategist at Bank of New York wrote in a note to clients. "If the BoE decides to hike rates on Thursday, don't be surprised to see the north sides of 1.35 in EUR/USD and 2.00 in cable."
Most analysts expect the BoE to keep rates on hold at its policy meeting this week, but markets are pricing in a 40 percent chance that the central bank will raise rates from 5.25 percent, bringing them above the US federal funds rate. The US dollar fell 0.1 percent to 117.70 yen while the euro crept up 0.1 percent to 157.50 yen.
The Australian dollar, the day's best performer, hit a 10-year high of US $0.8181. A climb over US $0.8215 would put the pair at the highest since October 1990, according to Reuters data. It last traded up 1 percent at US $0.8165.