The dollar fell versus the euro on Monday, retreating towards record lows set last week as investors saw little reason to change the view that more Federal Reserve interest rate cuts are imminent.
Investors remain on edge about more fallout from the credit crunch as the approaching year-end may force investors to dump assets or scramble for cash to get their books in order amid market strains.
However a small increase in risk appetite driven by rising Asian and European equities led to a rise in high yielding currencies like the Australian dollar. "Risk appetite has come back a bit with stocks up across the board so we've seen a rally (in high yielding currencies) from oversold technical positions (reached) last week," said David Woo, head of currency research at Barclays Capital.
By 1116 GMT, the euro was up a quarter percent at $1.4873, edging again towards an all-time high of $1.4966 set on Friday according to Reuters data. A growing number of analysts reckon the exchange rate could breach the psychologically key $1.50 level this year.
The yen edged away from a 2-1/2-year peak against the dollar as the stronger equity markets spurred some market players to tiptoe back into carry trades, which involve borrowing the low-yielding Japanese currency to buy higher yielders. The dollar edged up 0.1 percent from late last week to 108.44 yen after having slid as far as 107.53 yen on Friday, the lowest since June 2005.
Worries about the US economy and expectations for repeated Federal Reserve rate cuts have caused the dollar's broad tumble to accelerate against low-yielding currencies such as the yen and Swiss franc, as well as versus the euro.
The euro was up 0.35 percent at 161.33 yen. The high yielding Australian dollar was up by more than 1 percent to US $0.8861. The New Zealand dollar and sterling, also carry trade destinations, all rose versus both the US currency and the yen.
European officials have increasingly expressed concern about the euro's rapid rise and the potential drag on exporters. ECB Governing Council member Nout Wellink said on Monday that the euro's rise against the dollar was not of "immediate concern" for European exporters, but a further ascent would be "worrying".
ECB Executive Board Member Lorenzo Bini Smaghi said over the weekend that the current euro/dollar rate does not exactly reflect economic fundamentals, and the US economy is stronger than is reflected in the exchange rate. French President Nicolas Sarkozy called on Chinese President Hu Jintao to let the yuan rise faster versus the euro.
"I think we are getting close to a period of the ECB being a little bit more vocal in terms of trying to slow the pace of euro/dollar rally, but for now it seems there's very little in terms of actions which are going to preclude the euro/dollar from continuing to trade higher," said Jeremy Stretch at Rabobank.
Fan Gang, an adviser to China's central bank, said the dollar's recent fall and the subprime mortgage crisis in the US are adding to pressure for the Chinese yuan to appreciate.