Dollar inches up as investors unwind positions after weakest month in a decade

NEW YORK: The dollar was slightly higher against a basket of currencies on Monday as investors unwound some recent short positions following the currency's weakest monthly performance in a decade.

The dollar index, which measures the greenback against a basket of leading currencies, posted a more than 4% decline for July, its biggest monthly drop since September 2010.

The weakness has been tied to market expectations for further easing of US monetary policy and a lack of agreement among US lawmakers on further fiscal stimulus. Falling US bond yields have also been cited as a factor.

The day's strength may be tied in part to investors moving out of short position, strategists said.

"Sentiment was overdone," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "The swing in the pendulum of market sentiment hit such an extreme," which led investors to unwind short positions, he said, but he added he expects the dollar to resume its trend lower.

The dollar pared gains in the wake of US economic data, and was only slightly higher by late afternoon New York trading.

US construction spending fell to a one-year low in June. In a separate report, the survey from the Institute for Supply Management (ISM) showed US manufacturing activity accelerated in July to its highest level in nearly 1-1/2 years, but that hiring at factories remained subdued.

The dollar index hit a session high of 93.997 and was last up 0.13% at 93.532. The dollar gave back some gains on the data, Chandler said, adding the market will focus on Friday's US jobs report.

Speculators' net shorts on the US dollar have soared to their highest since August 2011 at $24.27 billion, Reuters calculations and US Commodity Futures Trading Commission data show.

At the same time, the euro last traded at $1.1760, down 0.12% on the day.

Sentiment on the euro had improved after European Union leaders agreed last month to a 750 billion euro ($882 billion) economic recovery fund while taking on debt jointly in a show of regional cooperation.

Against the Japanese yen, the dollar gained 0.1% to push past the 106-yen-per dollar mark.

On Friday, the dollar posted its biggest daily rise against the Japanese currency since March. The yen had rallied 3% in July.

On Friday Japanese Finance Minister Taro Aso described the yen's recent rise as "rapid," signaling concern that a strong currency could further damage an export-led economy already in recession.

A growing US fiscal deficit to finance the stimulus prompted Fitch Ratings to revise its outlook on the United States' triple-A rating to negative from stable.