The dollar rose from record lows against the euro on Monday as investors pared bets against the U.S. currency on a rally in stocks and a dip in oil prices ahead of a batch of economic data and central bank meetings.
The greenback got a boost as U.S. benchmark indexes soared more than 1 percent and the Dow Jones industrial average hit an all-time high. A sharp drop in oil prices helped ease some inflation fears and also lent support to the dollar after it lost about 4 percent of its value and fell to a record low against a basket of currencies in September.
European Central Bank President Jean-Claude Trichet underscored on Monday the United States' strong dollar policy, setting the stage for a concerted push for stronger language on currencies at the upcoming Group of Seven meeting.
The greenback is stronger on balance as the fourth quarter begins. After a tough September today's gains are mainly corrective, said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York. Further consolidation in the currency markets in coming days would not be a surprise.
By late afternoon in New York, the euro was down 0.3 percent from late Friday at $1.4234, after having scaled a record high earlier of $1.4281, according to Reuters data.
The dollar index, a gauge of the greenback's value against a basket of six major currencies, hit a lifetime low of 77.657 before rebounding to 77.923, up 0.3 percent on the day.
The greenback reacted little to a measure of September U.S. manufacturing which hit its lowest since March but the gauge's employment measure registered growth, boding well for the main item of interest this week: Friday's U.S. payrolls data.
The data will only encourage a view not to get too dollar short before this Friday's employment report, said Alan Ruskin, chief international strategist with RBS Greenwich Capital in Greenwich, Connecticut.
The Institute for Supply Management on Monday said its index of national factory activity fell to 52.0 from 52.9 in August, while its employment index rose to 51.7 from 51.3.
In the last three months, the dollar index has tumbled 5.1 percent, the biggest quarterly decline since the fourth quarter of 2004. Dealers said it was normal for currencies to back-track after such dramatic moves in one direction.
The dollar climbed 0.8 percent against the yen to 115.71 yen, helped by soaring U.S. stock prices. Investors warily reentered high-yielding, high-risk bets called carry trades, many of which are funded by borrowing cheaply in yen.
The Australian dollar, another high-yielding currency, scaled an 18-year peak at US$0.8949.
Analysts urged caution though, especially since the current credit crunch may not have worked itself out completely yet.
We do remain wary of this move back into risk, as we think there's likely further adjustment to come on the back of this financial crisis, said Todd Elmer, currency strategist with Citigroup in New York. Deterioration in the U.S. outlook justifies a weaker dollar.
A cut by the Federal Reserve of its benchmark interest rate by half a percentage point to 4.75 percent last month to boost the U.S. economy triggered a major downtrend in the dollar.
In addition to economic data this week, investors are looking for the outcome of several central bank policy meetings. The Bank of England, the ECB and the Reserve Bank of Australia all meet to set policy amid a global financial system still sensitive to tight liquidity.
(Additional reporting by Kevin Plumberg and Steven C. Johnson)