The euro hit an 11-month high against the dollar on Monday as fading prospects of an interest rate cut in Europe bolstered demand, while world share markets ticked lower following recent gains.
The common currency was up 0.2 percent at $1.3365, having hit a high of $1.3404 earlier for a hefty 2.5 percent jump since European Central Bank President Mario Draghi dampened expectations of further monetary policy easing in the near term.
Europe's FTSE Eurofirst 300 index .FTEU3 of top companies fell 0.4 percent but was still near a two-year high. The MSCI International ACWI price index of global shares .MIWD00000PUS was 0.2 percent lower but remained near an 18-month high.
U.S. shares were slightly lower as investors awaited an onslaught of corporate earnings reports. While some early numbers, notably from Alcoa Inc (AA.N), have indicated strength, many investors worry that uncertainty over the recent fiscal impasse in Washington may have pressured companies in the quarter.
"I think there's going to be more misses than hits in terms of revenue and margins. It's going to be a little bit light this earnings season compared to the last one," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
The Dow Jones industrial average .DJI was down 22.16 points, or 0.16 percent, at 13,466.27. The Standard & Poor's 500 Index .SPX was down 5.82 points, or 0.40 percent, at 1,466.23. The Nasdaq Composite Index .IXIC was down 20.07 points, or 0.64 percent, at 3,105.56.
The Nasdaq was pressured by Apple Inc (AAPL.O), which fell 3.5 percent to $501.71 after a report it had cut orders for LCD screens and other parts for the iPhone 5 this quarter due to weak demand.
Equity markets have risen and most major currencies have gained against the dollar so far this year after U.S. lawmakers struck a deal on taxes, easing fears of a sudden fiscal tightening that would slow the economy. Chinese data, which has begun to show a pick-up in momentum in the world's second- largest economy, has added to the optimism.
Japan, the third-largest economy, is embarking on a new strategy to lift itself out of recession, weakening the yen substantially but boosting Tokyo stocks.
The dollar's value against a basket of major currencies .DXY floated around its lowest levels since the start of the year.
Chicago Federal Reserve chief Charles Evans, a voting member of the Fed's policymaking committee this year, underlined the better outlook by forecasting the U.S. economy would grow 2.5 percent in 2013 and 3.5 percent in 2014.
Evans added that markets could be confident the U.S. central bank would take action to boost the recovery without letting inflation take hold, although he did not refer to any further Fed easing.
The benchmark 10-year U.S. Treasury note was up 8/32, the yield at 1.8377 percent.
Fed Chairman Ben Bernanke will speak on the outlook later in the day and investors will scrutinize his remarks for any clues on how much longer the Fed's bond purchase program will last.
Any suggestion that the Fed is in no hurry to end its quantitative easing program would probably lead to the dollar softening further against higher-yielding currencies such as the Australian dollar and those of faster-growing emerging economies.
The Japanese yen was flat at 89.17 yen against the dollar. Previously, the currency touched a 2-1/2-year low on expectations that a round of aggressive monetary easing is coming soon in Japan.
Prime Minister Shinzo Abe reiterated on Sunday his calls for the Bank of Japan to set a 2 percent inflation target and pursue bolder monetary easing to end nearly two decades of deflation.
Abe, who has already announced a huge budget stimulus for the Japanese economy, said he would appoint a new head of the central bank who shares his views when Governor Masaaki Shirakawa's term ends in April.
"The confirmation that there's going to be a push for a new governor (and) that new governor is going to have a mandate of 2 percent inflation - that plus the fiscal stimulus is a major negative for the yen," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
Tokyo markets .225 were closed on Monday for a holiday but MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.5 percent on the statement, remaining near a 17-month peak set on Friday.
The growing optimism over the outlook for the world's biggest economies helped commodity prices recover from last week's decline. Oil also benefited from a resurfacing of fears about a disruption of supply from the Middle East.
A cut in Saudi Arabian production last month, pipeline sabotage in Yemen and a weather-related drop in Iraqi shipments have reduced output, while fighting in Syria and Iranian naval exercises in the Strait of Hormuz reminded investors of the risk of wider disruption to Middle East supply. <O/R>
Brent crude gained 0.2 percent to $110.83 a barrel while U.S. crude was down 0.3 percent at $93.33 a barrel.
Copper edged down 0.3 percent to $8,020.75 a tonne and gold was rose modestly.