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 Under carry trades, investors sell a low-yielding currency to buy a
riskier, higher-yielding ones for better returns. When volatility
rises in global financial markets and stocks fall, they tend to take
these positions off the table.
European shares fell, with Germany's DAX and France's CAC on track
for their worst month in four years. Chinese stock markets also fell
while U.S. stock futures pointed to a weak start.
Volumes were relatively low with London shut for a holiday.
In Europe, data showed euro zone inflation was unchanged in August,
rising 0.2 percent year-on-year. And while it would offer some
comfort to the European Central Bank in the short term, any further
drop due to crude oil prices in coming months would build pressure
on the central bank to act.
And with a U.S. rate increase possible as early as next month,
traders said, the dollar's losses would be limited.
"Stocks markets are in focus and absence of risk appetite is acting
as a headwind to the dollar," said Niels Christensen, FX strategist
at Nordea. "Having said that, with a September rate hike back in
focus, I am biased towards more downside in the euro against the
dollar."
The dollar index, which tracks the greenback against a basket of six
major currencies, was down 0.15 percent on the day at 95.970, and
1.4 percent lower for the month. It was well above a seven-month low
of 92.621 reached a week ago as the prospect of a slowdown in China
sent global stocks plunging.
The dollar shed 0.4 percent to 121.25 yen, down about 2.2 percent
for August, but well above a seven-month low of 116.15 touched a
week ago. The euro rose 0.2 percent to $1.1210, below last
week's high of $1.1715 but still up 2.4 percent for the month.
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Nonfarm payrolls data on Friday will provide clues on whether the
Fed might raise rates as soon as its mid-September meeting. U.S.
business surveys, factory orders and trade data will also be
released this week.
The dollar could gain if U.S. data bolsters expectations for a Fed
rate rise within weeks, but the focus will be on whether risk
sentiment holds up under such a scenario.
"We think September liftoff is not necessarily bad for risk
sentiment," said Tan Teck Leng, FX strategist at UBS Wealth
Management in Singapore. Further rate increases by the Fed are
likely to occur gradually and Fed Chair Janet Yellen will probably
err on the side of dovishness, he said.
"Given this view, we still maintain a view that markets will be
risk-friendly, and hence look for further yen and euro weakness
versus the dollar," he said.
Fed Vice Chairman Stanley Fischer said in a speech at the annual
central bankers' meeting in Wyoming on Saturday that U.S. inflation
was likely to rebound as pressure from the dollar fades, allowing
the Fed to raise rates gradually.
(Additional reporting by Masayuki Kitano; Editing by Alison
Williams)
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