NEW YORK: The dollar dropped to a two-week low on Monday, as easing political tensions in Italy lifted the euro and global trade concerns resurfaced after China warned the United States against tariffs and other protectionist measures.
"With European political drama retreating from the brink, the peak in the dollar index was likely observed at 95," said Mazen Issa, senior FX strategist at TD Securities in New York.
Lingering trade disputes will also contribute to a challenging backdrop for the US dollar in the weeks ahead, he added.
"The US administration appears uncoordinated and unprepared with a global effort - that now includes China - throwing its hat in the ring of retaliation and withdrawal of a principled agreement to buy more US goods should the US decide to go through with purported tariffs later this month," Issa said.
The official Chinese news agency Xinhua reported on Sunday that if the United States introduces trade sanctions including raising tariffs, all the economic and trade achievements negotiated by the two parties a few weeks ago will be void.
In late trading, the dollar index fell 0.2 percent to 94.046 , hitting a two-week trough of 93.664.
The dollar fell on Friday despite a strong US non-farm payrolls report, suggesting the greenback has looked stretched after gaining consistently since mid-April.
Kathy Lien, managing director of FX strategy at BK Asset Management in New York, said even though the dollar is looking exhausted, it could be bracing for one more push higher ahead of this month's Federal Reserve monetary policy meeting.
Better-than-expected US jobs data last week underlined the strength of the US economy and the near-certainty of a Fed interest rate rise this month and probably a fourth hike this year, factors which have lifted the dollar.
"Unless something challenges that outlook, investors will be holding onto their dollars into the FOMC (Federal Open Market Committee) meeting," BK's Lien said.
The euro, meanwhile, clawed back some gains as Italy took steps to form a new government and as German Chancellor Angela Merkel said over the weekend that Germany favored moves toward a European Monetary Fund.
In late trading, the euro was up 0.3 percent at $1.1694, after rising as high as $1.1737, its highest level since May 24, pulling further away from 2018 lows of $1.151 last week.
The Australian dollar surged to its highest level since April on an improvement in broader risk sentiment and domestic data showing strong corporate profits and a rise in retail sales.
The Aussie was last up 1 percent at US$0.7650, posting its biggest one day-rise since August.