By Deborah Levine and Polya Lesova, MarketWatch
NEW YORK (MarketWatch) — The dollar pared losses against the euro and stocks fell further Monday after reports that another lawsuit was filed in Germany against Europe’s bailout fund.
Earlier, the euro gained on trader optimism that the European Central Bank may intervene in bond markets.
The euro EURUSD +0.41% pared gains to $1.2341, from a high of $1.2373 during the session and versus $1.2287 in late North American trading on Friday.
The ICE dollar index DXY -0.18% , which tracks the greenback against six major currencies, slipped to 82.411 from 82.541 Friday.
The new suit against the legality of the European Stability Mechanism, reported by Dow Jones, could delay a ruling expected in mid-September considered key to Europe’s plan to tackle the sovereign debt crisis.
That’s “killing the euro rally,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.
The S&P 500 Index SPX -0.49% lost about 0.4% in recent action.
As a separate pillar seen crucial to taming the region’s debt crisis, expectations that the European Central Bank may buy sovereign bonds soon in order to reduce borrowing costs for Spain and Italy have supported the euro in recent sessions. But when and whether it will act remain uncertain, and optimism over that prospect has varied in recent days.
“An expansion of risk appetite in the past few weeks suggests that market expectations of policy intervention are running ahead of a weakening global economy,” said currency strategists at Barclays. “The longer we go without actual actions, the more pressure risky assets and euro will come under.”
Analysts continue to see little reason for the euro to rise, though traders adjusting positions based on technical levels have supported the shared currency around its 20-day moving average, according to Christopher Vecchio, an analyst at DailyFX.
A further move down is likely, possibly as low as $1.1695 by mid-September, he said.
The WSJ dollar index XX:BUXX -0.14% , which uses a wider comparison basket of currencies, slipped to 71.53 from 71.61.
Meanwhile, the dollar was little changed versus the Japanese yen USDJPY +0.14% , buying ÂĄ78.35 after the market shrugged off worse-than-expected April-through-June data on economic growth. Read more on Japanese growth data.
No major U.S. economic data are due Monday. A report on retail sales for July is set for release on Tuesday; economists surveyed by MarketWatch held a median expectation that sales would rise 0.2%, which would be a reversal after dropping 0.5% in June. Read Economic Preview.
However, analysts at RBC Capital Markets tipped the result to come in better than the consensus view, “largely a function of the fact that we have been on a major losing streak in retail sales and that back-to-school shopping looks likely to be firmer than recent history.”
Still, they said that a strong gain for U.S. retail sales would “add to the muddied water” in terms of whether the Federal Reserve will embark on another round of quantitative easing in September.
In other currencies trading, the British pound GBPUSD +0.13% edged up to $1.5688, while the Australian dollar AUDUSD -0.48% fell to $1.0508 from late Friday’s $1.0572.
Deborah Levine is a MarketWatch reporter, based in New York.
Polya Lesova is MarketWatch's New York deputy bureau chief. Michael Kitchen in Los Angeles contributed to this report.
