LONDON: The euro held at three-year highs against the dollar on Monday after last week's surge, its rise fuelled by growing expectations that the European Central Bank will tighten monetary policy, while the dollar weakened further.

The dollar has dropped as markets grow increasingly confident that central banks will wind down their monetary stimulus. Measured against a basket of currencies, the dollar was down 0.2 percent on Monday, its lowest since early 2015.

Its recent weakness against the euro has been marked, as the growing economic recovery in the euro zone spurs more investors to rebalance their portfolios towards the region.

Speculators boosted net long positions in the euro to a record high for the week ending Jan. 12, according to the latest futures data. Against a basket of currencies, the euro is at its highest level since late 2014.

"We remain bullish on the euro in coming months because we expect that the political risks in the euro zone will finally start abating on a more sustained basis after the March election in Italy," Credit Agricole said.

"In addition, we expect the ECB to continue to taper its asset purchases and, ultimately, stop expanding its balance sheet ... . "

The euro was up 0.1 percent at $1.2218, adding to the gains it made last week after the ECB said it could revisit its communication stance in early 2018. That heightened expectations policymakers were preparing to reduce their stimulus programme.

Still, with the euro at three-year highs, some analysts cautioned that its strength would soon worry the ECB, encouraging it to talk down the currency.

Against the yen, the dollar slipped to its lowest levels since mid-September, as comments from the head of the Bank of Japan highlighted Japan's economic recovery.

Haruhiko Kuroda reiterated the central bank's resolve to maintain its stimulus programme until 2 percent inflation was achieved and maintained. But he also said the country's economy was expected to continue moderately expanding.

Core consumer prices are rising around 1 percent, Kuroda said in a speech to BoJ regional branch managers. That was a slight change from his previous speech to branch managers, when he said core consumer prices were around zero.

"We continue to see dollar/yen sellers, to be honest," said Bart Wakabayashi, branch manager for State Street Bank in Tokyo.

"Let's see if we start to see some rumblings from Japanese officials, about yen strength," he said. "We might see some comments to calm market expectations of yen strength."

China's yuan rose to its strongest in more than two years against the dollar, after a Bundesbank board member said the German central bank had decided to include the Chinese currency in its reserves and companies offloaded their dollar holdings.

The dollar was 0.2 percent lower at 110.74 yen, after earlier falling as far as 110.6.