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 The euro was holding most of Friday's gains at $1.3423 in morning
trade in Europe, although London-based dealers and analysts said it
was unlikely to take back much ground ahead of the European Central
Bank's August policy statement on Thursday.
"Thursday’s ECB meeting is likely to accentuate the euro's weakness,
in our view," analysts from Barclays said in a note.
"ECB President Mario Draghi is likely to reaffirm the central bank’s
commitment to using extraordinary policy measures to ease monetary
conditions, including the prospect of ABS purchases, and address
very low euro area inflation."
U.S. nonfarm payrolls handed the dollar its biggest one-day fall in
nearly a month on Friday, even if they did not do much to temper
expectations for the start of the Federal Reserve's interest
rate-tightening cycle.
The U.S. currency enjoyed its best month in July since January of
last year, feeding expectations it may finally be ready to rally for
the longer-term even if there seems to be little fuel for another
surge this week.
The Fed is thought to be heading steadily toward a first rise in
rates next year, while the European Central Bank may have to battle
falling prices with further monetary easing.
Overall euro zone inflation in July was just 0.4 percent.
"The dollar has gained a lot in the last few weeks so we were
probably due a positioning-led correction," said Geoffrey Yu, a
strategist at Swiss bank UBS in London.
"The inflation report last week did not help the euro but we don't
see any downside catalysts for it (from the ECB) this week. The main
interest is whether the dollar can continue this rally."
YEN VOLS
The dollar index was last at 81.365, having retreated from a 10-1/2
month peak of 81.573. It had fallen 0.2 percent on Friday, a modest
decline by any measure but still the biggest one-day fall in over
three weeks.
The pound blipped higher on the back of an upbeat construction
survey but was back under pressure by midday in London. After a 15
percent gain against the dollar in the year to July, analysts at
major banks are divided on whether two weeks of falls represent a
short-term correction for the pound or the end of the rally.
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Analysts at JP Morgan recommended backing the euro and the dollar
against the pound in a weekly note, pointing to an economy that was
reaching the top of the cycle. Against the yen, the greenback
recoiled to 102.62, having stretched to a near four-month high of
103.15.
Koji Fukaya, president at FPG Securities in Tokyo, said dollar/yen
popping above the 103 yen threshold several times last week spelled
a departure from the past six months, when the pair was stuck in a
narrow band around 102.
"There is also a trend change in dollar/yen implied volatility," he
said. "Vols have been dropping since the start of the year, but the
downtrend was broken in July and one-year implied vols briefly rose
above 8 percent last week. This could help initiate moves in the
cash market."
One-year dollar/yen implied volatility, or the expected price swing,
fell to a seven-year low of 6.90 percent in mid-July but rose above
8 percent on Friday, highlighting expectations of a new trading
range in coming weeks.
The Aussie dollar also popped back above 93 U.S. cents, from
two-month lows of $0.9275. After limited reaction to slightly
stronger-than-expected Australian retail sales figures, Aussie bulls
will be looking to a Reserve Bank of Australia interest rate meeting
on Tuesday.
(Editing by Catherine Evans)
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