The dollar climbed on Monday and the euro weakened as investors mulled last week's 'dovish taper' by the European Central Bank (ECB) and looked ahead to Tuesday's inflation data from the US.
The dollar index - a measure of the greenback's strength relative to a basket of rival currencies - rose 0.3% to 92.81 in early trade in London.
Meanwhile, the euro fell 0.3% against the dollar to $1.1778 and was down 0.1% versus the Japanese yen at JPY129.70 ($1.18). Against a weaker pound, the euro was fractionally lower at £0.8531.
Investors appeared to be taking bullish dollar positions ahead of Tuesday's consumer price index (CPI) inflation data from the US, where price pressures have remained heated for several months, despite assurances from the Federal Reserve that the current underlying inflationary trends are "transitory".
While Tuesday's CPI is not the Fed's favoured measure of inflation, having struck a 13-year high of 5.4% in July, Tuesday's August reading is expected to be similar. Other measures of inflation such as the Fed-favoured personal consumption expenditures hit a 4.2% annual headline rate in July.
"Looking at the full suite of the Fed’s alternative inflation measures, on balance they suggest a risk that inflation remains elevated in the years ahead," said Michael Pearce, senior US economist at Capital Economics.
Indeed, Capital Economics expects another CPI print in excess of 5%.
"We continue to think that inflation will prove more persistent in the US than elsewhere, underpinning rate expectations and thereby the dollar," said senior markets economist Jonas Golterman.
While dollar bulls were looking ahead to Tuesday's inflation data, bearish positions on the euro were prompted by last week's actions from the ECB - announcing it was to ease the pace of its bond buying under its Pandemic Emergency Purchase Programme, but keeping the total planned purchases of €1,850bn and continuing indefinitely its regular asset purchase scheme.
Strong bond sales equate to weaker bond yields, and without yield support, the euro is likely to struggle to gain ground against the dollar in the near term, analysts suggested.
"The ECB is not about to rip off the band-aid and bond markets will continue to enjoy significant support from asset purchases through 2021," said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.