Currency investors, wary of turmoil in the markets as write-downs blamed on the credit crisis accumulate, backed away from investing in high-yielding currencies with the yen and Swiss franc.
The so-called yen-carry trade involves selling off the low-yielding Japanese currency in favor of currencies in countries with higher interest rates.
The U.S. currency rose against the euro and the pound Monday.
The dollar bounce was "a corrective upward move," said Ashraf Laidi, chief currency analyst at CMC Markets U.S. "This is not a reflection of an improving landscape for the U.S. dollar."
The euro bought $1.4554 late in the afternoon, down from $1.4673 Friday and well below its all-time record of $1.4752, reached earlier in Friday's session.
The British pound, which has been trading at its highest levels against the dollar since the early 1980s, sank to $2.0595 from $2.0909
The unwinding of the yen-carry trade sent the yen higher, with the dollar falling as far as 109.13 yen, according to Dow Jones' Interbank foreign-exchange rates -- its first time below 110 yen for a year and a half -- before climbing up to 110.05 yen, below the 111.07 yen it was worth Friday.
"Losses in the stock market in the U.S. were broadening beyond just financial stocks" to technology stocks last week, said Laidi, kicking off the carry trade's decline. "Now there is uncertainty that the losses we saw in U.S. equities will not be confined only to U.S. banks and tech stocks, not only U.S. institutions but also the rest of the world," he said.
Asian markets fell sharply Monday as Wall Street ended last week down and major banks warned of ongoing credit-related problems.
The Canadian dollar continued Friday's decline against the U.S. dollar, trading at 96.45 Canadian cents Monday, down from 94.15 Canadian cents. The commodity-backed Canadian currency benefits when prices of Canada's exports, such as oil and gold, rise.
Oil and gold prices retreated from recent upwards charges as carry trades unwound as fears of global economic slowdown tamped interest-rate differentials trading.
No U.S. economic data were expected on Monday, the Veterans Day holiday, to help the markets gauge the direction of the economy and interest rates. The dollar has been suffering from speculation that the Fed, which recently cut rates twice, may keep doing so even as its major European counterparts have held their rates steady.
However, Paul Jackson, a senior forex dealer at CMC Markets, said the dollar "is regaining some significant ground against the pound as sliding business confidence seems set to pave the way for a rate cut at the Bank of England."
Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.
The dollar weakened late last week after Federal Reserve Chairman Ben Bernanke said economic growth would slow noticeably in the U.S. in the coming months while rising oil costs would increase inflation pressures.
U.S. government bond markets and related financial commodities markets are closed for the holiday. Other U.S. markets, including the stock markets, are open.
In other New York trading, the dollar nudged up against the Swiss currency, buying 1.1282 Swiss francs Monday from 1.1247 Swiss francs.