The dollar fell one per cent against a basket of currencies to its lowest level in more than a month, while the euro was 0.2 per cent stronger against the dollar at $1.5804 – a three week high.
The single currency gained almost one per cent against the dollar last week after traders decided the European Central Bank was much more likely to begin raising interest rates than the US Federal Reserve.
Players in the forex market were weighing up whether the euro would push through the record $1.60 mark this week, with most betting that the ECB will raise interest rates on Thursday.
That conviction was bolstered on Monday by data showing Eurozone inflation in June had reached 4 per cent, up from 3.7 per cent in May and double the ECB’s target rate.
Analysts at Barclays Capital said: We continue to expect further appreciation in the euro versus the dollar….it seems very likely that the ECB will raise its policy rate 25 basis points and we look for the subsequent press conference to maintain a hawkish bias.”
Over at Goldman Sachs, analysts advised their clients to keep betting on a strengthening euro, saying it was now more likely” that it could reach $1.60.
The dollar lost one per cent against the yen to Y105.13 and 0.4 per cent against the Swiss franc to SFr1.008.
The two currencies were boosted by growing risk aversion in light of turmoil in equity markets and a record oil price. When investors shy away from risk, they unwind the carry trade positions that depress the low-yielding yen and Swiss franc.