The dollar weakened against the euro and the yen on Monday, extending a selloff that has moved the U.S. currency away from multiyear highs as investors push back their timelines for the first U.S. interest-rate increase in nearly a decade.
The euro gained 1.3% to $1.0968 in late-afternoon trade. The dollar slipped 0.3% against the Japanese currency to 119.74 yen. The WSJ Dollar Index, a broad measure of the greenback's strength against a basket of currencies, fell 0.9% to 86.66 and has declined in five of the past six trading sessions.
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The dollar's run lower continues to reflect investor hesitation over U.S. interest rates, as well as their sense that the currency has strengthened too much, too quickly.
Investors have bet heavily over most of the past year that the dollar would gain as stronger U.S. data would move the Federal Reserve to raise interest rates. Hedge funds and other investors have pushed bets against the euro closer to two-year highs, and one-sided wagers against other currencies remain overwhelmingly in the dollar's favor, according to the most recent numbers from the U.S. Commodity Futures Trading Commission.
Following the central bank's policy meeting last week, Fed Chairwoman Janet Yellen identified the dollar's strength as a factor behind weaker U.S. exports. Analysts have speculated whether the robust dollar, alongside lower oil prices, could hold inflation back from rising toward the Fed's target of 2% and subsequently postpone the first interest-rate increase since 2006 until later in the year.
Investors predict that higher U.S. rates would boost demand for the dollar, as increased borrowing costs would lift returns on assets denominated in the currency. The potential for a delay has taken steam out of the dollar's rally, said Shaun Osborne, head of global currency strategy at TD Securities.
"We may have to see the whites of the Fed's tightening eyes before we see the dollar rally more," Mr. Osborne said. "Positioning has become quite extreme; it's going to take a lot to get the dollar moving higher again."
TD Securities predicts the Fed would raise rates around September, rather than June. Other traders and investors agree, according to CME Group data on fed funds futures, which the market uses to bet on U.S. monetary policy.
The euro could rise higher than $1.11 over the next few months before falling below parity with the greenback by the end of the year, Mr. Osborne said. The dollar would continue to struggle if a measure for inflation in February scheduled for release Tuesday shows stagnating or falling U.S. consumer prices.
In contrast to the U.S., major central banks around the world are easing monetary policy to juice growth and inflation, moves that depreciate their currencies.