The dollar fell to three-week lows against the euro on Monday, dented after oil prices surged late last week to a record high, data showed US consumer sentiment hit a 28-year low and Wall Street stocks extended their slide.
The battered stock market and worries over the credit market scaled back expectations for how soon the Federal Reserve could boost interest rates, even after the central bank said inflation risks have risen and kept interest rates on hold last week.
The dollar found some brief support on month-end buying from Japanese importers and demand tied to Japanese investment trusts, traders said. "The surge in oil prices and the slide in US stocks keep the dollar's outlook gloomy and make it difficult for the currency to recover strongly," said a senior dealer at a European bank.
"Players are waiting to see whether this week's key events provide clues about the dollar's direction," the dealer said. The Bank of Japan releases on Tuesday its quarterly tankan survey of corporate sentiment, while the European Central Bank holds a policy meeting on Thursday and is widely expected to raise rates to 4.25 percent to rein in rising prices.
The key US jobs data is also due on Thursday. The dollar came under additional pressure after US financial shares fell on Friday on worries about more credit losses. Lehman Brothers forecast Merrill Lynch would write down another $5.4 billion in the second quarter, while Moody's said it may cut Morgan Stanley's credit rating.
With Friday's fall, the Dow Jones industrial average was down 14.5 percent for the year, and was more than 20 percent below its October 2007 peak at one point, meeting a traditional definition of a bear market. "After this week's events, stock markets will likely take the lead and determine the dollar's fate," said a senior trader at a Japanese trust bank. "If currencies such as the yen climbed on Friday as risk appetite waned on losses in global equity markets.
While the yen may be benefiting from bouts of risk aversion that prompt an unwinding of carry trades, expectations for rising overseas interest rates to combat inflation pressures will likely keep the yen weak against higher-yielding currencies, traders said. The euro was little changed at 167.51 yen slipping from the day's high of 168.13 yen but off Friday's low of just above 167.00 yen. Against the yen, the euro was set to post its biggest quarterly rise in five years. It hit a record high of 169.47 yen last week.