The dollar weakened across the board on Monday, failing to sustain last week's gains as investors saw few prospects for a US rate hike, while the euro and other currencies linked to rising interest rates strengthened.
The euro hit a record high against the low-yielding yen, while the Australian and New Zealand dollars also hit fresh multi-year peaks against the Japanese currency. A tumble of more than 8 percent in China's benchmark equity index only provided a brief respite for the yen, unlike in February when a sell-off in the Shanghai bourse boosted the Japanese currency and sparked slides in global stock markets.
"Interest rate differentials and high-yield currencies versus low yielders remain the broad themes for foreign exchange trading," said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York.
"The dollar failed to sustain gains from last week based on the assessment we are still very far from a situation of rate hikes in the US, while rates are still going up elsewhere." The European Central Bank meets on Wednesday and is expected to raise its benchmark rate 25 basis points to 4.00 percent and possibly signal further increases.
Although a report on Friday showing the US economy added 157,000 new jobs in May reduced market expectations for the Federal Reserve to cut interest rates this year from 5.25 percent, a rate hike is still seen as a long shot. Late afternoon, the euro was up 0.3 percent at $1.3488, nearly a cent above Friday's eight-week low of $1.3391. The dollar was down 0.25 percent at 121.75 yen.
The euro earlier hit 164.36 yen, a lifetime high, according to electronic platform EBS, and last traded at 164.25. A report showing a smaller-than-expected 0.3 percent gain in US factory orders in April had little impact on currency prices.
Central banks in Britain, Australia and New Zealand are expected to hold rates steady when at their own policy meetings this week, though analysts see an outside chance of hikes from the Reserve Bank of New Zealand and Bank of England.
The prospect of higher rates in these economies has supported their currencies. And with Japanese interest rates still stuck at 0.5 percent - the lowest in the developed world - investors continue to embrace carry trades, which involve borrowing yen cheaply to finance purchases of higher-yield currencies and assets.
"Risk appetite remains fairly strong, supporting carry trades. The ECB meeting this week should indicate that the ECB has a lot more to do (on rate increases) while the economy in Japan is sluggish," said Niels From, currency strategist at Dresdner Kleinwort.
The Aussie dollar has risen recently to a 15-year peak against the low-yielding yen and the kiwi to a 17-year high. But some analysts said that after hiking rates this week, the ECB may pause for a few months to observe the impact its tightening campaign has had on the economy, leaving the dollar poised to stage a corrective rally.
"I wouldn't be surprised to see more neutral ECB language this week, and if US data continues to hold up, we could see the euro fall to the $1.30-$1.31 area over the coming weeks," said Shaun Osborne, senior currency strategist at TD Securities in Toronto.