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Dollar takes a breather from rally as commodities gain

Oil rose at one stage by more than $1 to above $115 a barrel

and gold bounced off a nine-month low to test $800 an ounce. That trimmed losses which led the Reuter-Jefferies CRB Index to lose around 18 percent from its July peaks.

Higher commodity prices tend to be U.S. dollar-negative as the bull-run in raw materials added to upward inflation pressure at a time when the U.S. economy was slowing sharply in the wake of a year-old global credit market crisis.

"The dollar seemed to overshoot the macro adjustments last week... with the massive liquidation in the commodity markets. But we're seeing some signs of stability there and second thoughts about how far oil will fall is allowing the dollar to take a breather," ING head of FX research Chris Turner said.

The euro fell to a six-month low of $1.4645 on trading platform EBS in early Asian trade before recovering to $1.4712, up 0.1 percent from late Friday U.S. trade.

It has tumbled nearly six percent against the dollar in two weeks due to increasing investor concern that the slowdown in the U.S. economy will be replicated in Europe and globally.

Data last week showed euro zone growth contracted in the second quarter for the first time ever, helping scotch any expectations of euro zone rate increases.

The dollar has also garnered broad support from the view that the Federal Reserve has probably ended its easing cycle after cutting rates by over 300 basis points over the last year.

The dollar index, which measures the dollar's value against a basket of six currencies, eased 0.1 percent to 77.046 from a seven-month high of 77.268 reached on Friday.

The dollar retreated 0.25 percent to 110.22 yen while the euro was steady at 162.22 yen.

Catching falling knife

The euro is broadly seen as vulnerable to further falls as investors reposition their portfolios to catch up with the rapid rise of the dollar.

"The massive repositioning of the market, reflected in IMM data, has lent considerable momentum to the dollar," said Calyon in a note to clients, saying forecasting a floor for the euro "is now akin to catching the falling knife".

Monday is very quiet for data but investors will look to Germany's ZEW gauge of economic sentiment and euro zone service sector activity later in the week for more clues on the extent of headwinds affecting the euro zone economy.

The dollar's stronger tone was seen likely to last a while since investors are seeing signs of economic weakness in other regions while the U.S. economic slowdown may be moderating.

Market expectations were growing for central banks in Australia and Britain to cut interest rates in coming months while the Federal Reserve keeps U.S. rates on hold for a while.

"The market already believes that the bulk of necessary easing by the Fed has already been completed, consequently allowing the dollar to enjoy gains in yield expectations against its peers in G10," UBS said in a note to clients.

The high-yielding Australian and New Zealand dollars, which have seen heavy losses in the last two weeks, benefited from higher commodity prices as major exporters of raw materials.

High yielding currencies like the Aussie and kiwi dollars also tend to benefit from higher risk appetite. The UBS risk index fell due to lower cross market volatility pointing to increased risk appetite.