LONDON: The dollar rose against a basket of currencies for a third trading day running on Monday, as worries about a China-led "currency war" abated and traders focused instead on the prospect of higher US interest rates.
The dollar index hit a one-month low last week after the People's Bank of China unexpectedly devalued the yuan, dampening expectations that the Federal Reserve will raise interest rates in September.
But after the PBOC set the yuan slightly above its fixing rate on Friday, soothing fears that Beijing was intent on a bigger devaluation, markets have once again turned their attention monetary policy diverges between the world's major economies.
Against the euro, expected to remain weak as the European Central Bank pressing on with a 1 trillion euro asset-purchase programme, the dollar traded at its strongest in five days, reaching $1.1063 per euro before easing a little to $1.1098, still up around 0.1 percent on the day.
With little in the way of major US data on Monday or Tuesday, investors are awaiting Wednesday's inflation data and minutes from the Fed's latest policy meeting.
"We suspect that the data this week, especially the core CPI (consumer price inflation) print, as well as indications from the minutes, will allay concerns that the Fed may delay lift-off beyond September.," said Credit Agricole's head of G10 FX strategy in London, Valentin Marinov.
"We think the policy divergence trade is alive and well and the dollar should remain the main beneficiary of that."
The dollar index was 0.2 percent up on the day at 96.711, but still not far from the one-month trough of 95.926 reached last week.
"People have the China move last week still in the back of their minds but our view is that (the Fed is) still on course to raise rates in September or October."
After data showed Japan's economy shrank in the second quarter, adding pressure on Prime Minister Shinzo Abe to step up a stimulus drive, the dollar gained 0.2 percent to trade at 124.53 yen. With emerging market currencies remaining wobbly, some analysts said the yen was being kept from falling lower by its safe-haven status. Market watchers are divided over whether the Bank of Japan will announce more policy easing in October.
That could put the onus more on the government to offer more fiscal support.
Data from the US financial watchdog on Friday showed speculators increased their yen short positions in the week to last Tuesday to the highest level since June. That suggests many may need to buy back the yen in the future.
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