The dollar rose to it highest level this month against the euro on Monday but fell to an August-low versus the yen, as investors sought the safety of lower-yielding assets amid a drop in global stock indices. The appetite for risk retreated after disappointing U.S. data releases last week and another U.S. bank failed over the weekend.
This has dragged down world stocks and sent traders back to the currencies in which they typically use to fund riskier bets - the dollar and yen. As a result, the euro declined to $1.4045 - its lowest level since July 30. The dollar fell to Y94.19, its lowest rate since July 29.
"The market's overwhelming bet of late that the seemingly straight-line path to economic prosperity would continue is now being drastically unwound as dollar bears are squeezed out of their highly-leveraged currency positions," said Mark Frey, head foreign exchange trader at Custom House.
The latest U.S. Treasury flows data are also dollar supportive, although they had little market impact Monday morning. Foreign demand for long-term U.S. financial assets grew in June much more than expected.
"Many were concerned that in recent months there was much more interest in the short end than long end," said Marc Chandler, head of global foreign exchange strategy at Brown Brothers Harriman in New York. "This big jump in the long end is a mind-blowing number, like almost five times more than the market expected."
"This could help dollar sentiment," he added.
Other higher-yielding currencies that have attracted a large amount of speculative positioning, such as the Australian dollar, Canadian dollar and Mexican peso, are also under pressure versus the greenback Monday.
Chris Turner, head of foreign exchange strategy at ING Financial Markets in London, said that the correction in the Aussie dollar could be used as a guide for the euro. The Australian dollar was recently trading at $0.8197.
"Below $0.8080/$0.8100 risks a sharper sell-off," said Turner.
However, analysts question whether this paring of risk is anything more than a blip of profit-taking.
"[Thin] summer markets imply a lack of desire to push crosses too far in either direction," said Stuart Bennett, a senior foreign exchange strategist at Calyon in London. "Hence, it is difficult to see the week's events producing any fresh direction for the foreign exchange markets."
Late Monday morning in New York, the euro was at $1.4080 from $1.4190 late Friday, according to EBS via CQG. The dollar was at Y94.32 from Y94.83, and the euro was at Y132.82 from Y134.53. The U.K. pound was at $1.6295 from $1.6537, and the dollar was at CHF1.0794 from CHF1.0730.
Regulators seized Colonial Bank on Friday after reaching a deal to sell its branches, deposits and most of its assets to rival BB&T Corp. in the fifth-largest bank failure in U.S. history. It was the latest sign that while large institutions may be stabilizing, tension remains for regional lenders.
Meanwhile, U.S. consumer confidence data last week, as well as retail sales, came in worse than expected.
Although euro-zone gross domestic product surprised to the upside, thanks to France and Germany, other countries in the region remain under severe pressure.
Japan growth data overnight was somewhat positive, but fell short of economist expectations. Japan's economy grew for the first time in five quarters in the April-June period, with real gross domestic product up 0.9% from the prior quarter.
Elsewhere, in another sign that China may be attempting to diversify from its reliance on the dollar, the government said Monday it will expand a trial in which cross-border trade transactions are settled in yuan to the northeastern part of the country, state television reported.
The Canadian dollar is down after falling to a four-week low overnight in line with weaker global equity markets and sustained risk aversion.
Currency strategists at TD Securities said Monday that the recent upward lurch for the U.S. dollar-Canada pair appears to have forced some market players to the sidelines to re-assess, adding to the illiquidity and erratic volatility for the pair.
They said that the U.S. dollar's rise to its recent high took place "with relative ease, and while this may reflect a lack of liquidity and interest as much as the stronger U.S. dollar tone, it does suggest that the main near-term risk is higher."
The dollar and yen fell on Friday after a strong U.S. housing sales report and upbeat comments from Federal Reserve Chairman Ben Bernanke reduced the safe-haven appeal of the U.S. and Japanese currencies. 
