The dollar dipped from near a five-week high against the euro as oil prices jumped above $126 a barrel, surrendering some of the gains scored last week after data showed US companies cutting fewer workers than expected. The US currency has staged a broad recovery as mounting signs of a broader global economic slowdown have prompted investors to sell other major currencies where they had seen a possibility of higher rates.
The Australian dollar has taken a big hit as investors have been caught off guard by a sharp shift in expectations towards interest rate cuts, tumbling nearly 3 percent against the dollar and yen last week for its biggest weekly drop since the Bear Stearns collapse in March.
Traders said the Aussie likely had more room to fall as market players come around to the view that the Reserve Bank of Australia, which holds a policy meeting on Tuesday, could start cutting interest rates before long. "Definitely in the Aussie, there are longer-term macro longs that need to come out," said Gerrard Katz, head of North Asia currency trading at Standard Chartered in Hong Kong.
Katz said the dollar was also buoyed by investors shifting funds out of Asian stock markets and into safer assets. Falling global stocks have prompted market players to trim carry trade positions in the past few days, although the once tight link between the performance of stocks and carry trades has weakened in the past few months.
Japan's Nikkei share average fell 1.1 percent. Wall Street shares retreated on Friday, partly after General Motors recorded a $15.5 billion quarterly loss and had its credit ratings downgraded further into junk territory.
This week's events will feature a raft of central bank meetings including the Federal Reserve and RBA on Tuesday, as well as the Bank of England and European Central Bank later in the week. The euro edged up 0.1 percent from late US trade last week to $1.5582, up from a five-week low of $1.5514 struck on trading platform EBS on Friday.
The dollar lost ground as oil climbed about 1 percent to a high of $126.35 a barrel after the United States said world powers have no choice but to increase sanctions on Iran and a tropical storm formed near oil facilities in the Gulf of Mexico. The dollar was up 0.1 percent at 107.75 yen, recovering from an initial dip as Japanese investors and currency traders scooped up higher-yielding currencies.
Analysts have said the dollar could benefit by default as downgrades to the growth outlook for the euro zone and major economies hurt other currencies, even as the greenback is dogged by the shaky US economy and financial system. "The increased possibility of rate cuts by central banks other than the Fed could propel a stronger dollar," said currency strategists at UBS in a note to clients.
Against the yen, the euro rose 0.2 percent to 167.91 yen. The Australian dollar was up 0.3 percent at $0.9318, holding near a three-month low of $0.9285 struck on Friday. The Aussie gained 0.4 percent to 100.41 yen, recovering from a two-month low of 99.78 yen hit earlier in the day.
The Aussie received a reprieve as the second-quarter Australian house prices reading was not as bad as forecast, falling 0.3 percent from the previous quarter against expectations for 1.0 percent drop. Money market futures are pricing in a 30 percent chance the RBA could cut rates by a quarter-point at Tuesday's meeting, even as most analysts say it is unlikely the central bank will switch gears on policy so quickly.