The dollar weakened against major currencies on Monday, plumbing fresh multi-year depths against higher-yielding units as bearish sentiment toward the greenback and the outlook for U.S. interest rates gripped markets.

The New Zealand dollar rose to a fresh 22-year post-float high above $0.79 after strong inflation data boosted expectations of an interest rate increase next week.

This helped to lift the Australian dollar to an 18-year peak and sterling to levels not seen in over quarter of a century.

Interest rates in New Zealand, Australia and the UK offer investors high -- and rising -- returns. In contrast, U.S. interest rates are seen steady for the rest of the year with a small possibility of a cut, a factor which has kept the greenback on the back foot in recent weeks.

For the moment, the outlook isn't very favorable to the dollar ... as long as longer-term yields in the U.S. remain (relatively) low, said Roberto Mialich, currency strategist at Unicredit-MIB in Milan. Many currencies are appreciating quickly, almost exclusively against the dollar. We expect the dollar to remain under siege. There's no incentive right now to reverse the trend.

Last week's surprisingly soft June U.S. retail sales data and concern over the possibility of problems in the subprime mortgage market spilling over to the broader economy are also weighing on the dollar, Mialich added.

At 0955 GMT the dollar index was down around 0.2 percent on the day at 80.458, flirting with 2-1/2 year lows.

The euro was up 0.1 percent at $1.3800, just below all-time highs of $1.3813 struck on Friday, while sterling was at a 26-year high of $2.0398.


The New Zealand dollar and Australian dollar were trading at 22-year post-float and 18-year highs respectively, of $0.7919 and $0.8748.

The dollar was down a quarter percent against the yen at 121.61 yen, while the euro was at 167.84 yen -- just under one yen below record peaks.

A public holiday in Japan thinned trading volumes in Asia.

Investors are eyeing U.S. inflation data and Congressional testimony by Federal Reserve Chairman Ben Bernanke later this week for a further steer on the U.S. monetary policy outlook.

Investors are pricing in around a 15 percent chance that the Fed will cut rates by a quarter percentage point by the end of the year. In contrast, strong economic growth and persistent inflationary pressures are buoying expectations of a rate rise in most other industrialized nations.

Data on Monday that showed New Zealand's consumer prices rose more than expected in the second quarter prompted markets to price in a rate rise to 8.25 percent as soon as next week.

The kiwi is rallying fairly strongly on the back of the market increasingly pricing in a risk of a rate hike next week and dragging the Aussie up with it, said Adam Cole, senior currency strategist at RBC Capital Markets.

Virtually every G10 central bank is still on the tightening cycle, and the debate in the U.S. is whether they hold or cut, and that's not a positive background for the U.S. dollar.

However, analysts at JP Morgan and Lehman Brothers on Monday warned against chasing the New Zealand dollar much higher, noting that the Reserve Bank of New Zealand could repeat its kiwi-selling intervention from last month.

Investors are looking to Bernanke's Congressional testimony on Wednesday and Thursday for clues on how worried the Fed is about the troubled subprime mortgage sector and whether the Fed may switch its focus away from core inflation numbers to the higher headline figures, which include food and energy prices.

Brent oil futures hit $78 a barrel on Monday, an 11-month high and within sight of their all-time highs.