The dollar broadly steadied on Monday, rebounding in the European session from fresh lows in Asia as continued concern over the US subprime mortgage and credit markets failed to herald sustained selling. The dollar had earlier taken the brunt of ongoing concern sweeping global financial markets that subprime and credit weakness could spill over to the broader US economy.
Pushing the greenback to a record low against the euro and fresh multi-year lows against sterling and the on Monday didn't move in lockstep with one another. Credit spreads widened and eurozone bond yields fell further, while Treasury yields steadied, equities firmed and the dollar consolidated.
It remains to be seen, however, how long this will last. "The dollar's performance (in Europe) has been a little more mixed. It's more of a mixed bag today but I'd say that's more down to positioning - the euro and sterling go to new highs then we get a little bit of a pullback," said Frida Gjorstrup, currency strategist at J.P. Morgan in London.
"There's no shift in the fundamentals. The market will remain nervous in the near term," she added. At 1145 GMT the euro was 0.1 percent down on the day against the dollar at $1.3804, after hitting an all-time high earlier in the session of $1.3844, according to Reuters data.
Sterling hit a 26-year high versus the dollar above $2.06, before paring those gains to trade flat on the day at $2.0565. "Asia goes short dollars, Europe squeezes them out," said the head of FX sales at a bank in London. The New Zealand dollar rose above $0.80 for the first time since the currency was floated in 1985, and at 1145 GMT was still up 0.4 percent on the day at $0.8010.
The dollar was flat against the yen at 121.30 yen, having hit a six-week low of 120.82 yen earlier in the day, according to Reuters data, while the euro was also flat against the Japanese currency at 167.57 yen.
The dollar was up 0.3 percent against the Swiss franc at 1.2040 francs, while the dollar index against six major currencies was steady at 80.30, albeit anchored near Friday's 12-year low of 80.117.
There are no major economic data releases from the United States, UK or the eurozone on Monday, leaving FX investors to focus on equity, credit and bond markets for direction.
The dominant theme is still likely to be the nervousness pervading US housing and credit sentiment. "In the short term, we continue to see the subprime and credit concerns as a US, rather than global, issue. As such, we expect broader dollar weakness to remain the key theme in FX markets this week," Barclays Capital strategists wrote in a research note on Monday.
"There is likely to be considerable volatility in the carry trade as the anxiety in the US credit market continues this week amid the CDO (collateralised debt obligation) crisis, further ratings downgrades and contagion to other credit markets."
Elsewhere, the currency matching system of news and information provider Reuters Group Plc suffered a temporary outage on Monday, forcing some traders to switch to alternative venues or trade over the phone. The outage hobbled trading in currencies primarily traded over the Reuters platform for much of the Asian session, affecting trades in sterling, and the Australian, New Zealand and Canadian dollars.