The dollar was mostly flat on Monday in a quiet session, but expectations the Federal Reserve will keep interest rates unchanged this year even as other central banks tighten monetary policy kept sentiment negative.
Analysts said Friday's surprisingly robust US jobs report was not enough to reverse the recent trend of narrowing interest rate advantage for the dollar over major European currencies, which has eroded demand for the greenback.
High oil prices and steady growth are expected to keep the European Central Bank on a tightening path, although the Bank of Japan will likely lag all other Group of Seven central banks bar the Fed, even if it does hike rates from 0.5 percent some time this year.
"The dollar remains biased to the downside as a result of the outlook that US interest rates will remain steady for the remainder of this year, which contrasts with rate hike expectations in Canada, the euro zone, UK and Japan," said Omer Esiner, foreign exchange market analyst with Ruesch International in Washington.
By early afternoon, the dollar index was up 0.04 percent on the day at 81.453. Last week Thursday the index fell to a 2-1/2-year low of 81.242. The euro was flat at $1.3621, within striking distance of its record peak above $1.3680 struck in April.
Sterling rose 0.3 percent to $2.0157. "We're continuing to consolidate here. As long as the euro stays above $1.36 and sterling above $2.01, that should bode well for a push higher. We'll probably test the highs in the euro this week above $1.3680," said Jake Lee, foreign exchange dealer at Union Bank of California in Los Angeles.
Right now investors buying a 2-year US Treasury note would theoretically get 44 basis points more yield than if they purchased euro zone government debt with the same maturity. However, three weeks ago the spread was more than 60 basis points in the dollar's favour.
The US dollar's sluggishness was most apparent against the Canadian dollar, which hit a 30-year peak against the greenback around C$1.0445 on widespread expectations the Bank of Canada will raise rates a quarter point to 4.5 percent on Tuesday.
Because there is hardly any US economic data this week, the Bank of Canada decision and statement could take on more significance for currency markets than it otherwise might.
"Incoming (Canadian) data have recently strengthened the case for tightening," said CitiFX in its latest research note. "Both headline and core inflation remain above target, labour markets are firm and the fundamentals appear to be in place for faster expansion, against a backdrop of elevated commodity prices," the bank added.