The euro rallied as better-than-expected European economic data helped the currency bounce from a six-week low against the dollar.
Data provider Markit said its monthly gauge of factory activity across the 17 nations that use the euro rose to 51.3 in October from 51.1 in September. A reading above 50 indicates expansion.
The news sent the single currency to as high as $1.3525 versus the greenback, after hitting $1.3442 during the Asian trading session, its weakest level since Sep 18.
Most market watchers, however, expect any euro gains to be limited heading to Thursday's European Central Bank meeting. Weak inflation readings last week from Germany, the euro zone's largest economy, raised concerns that the ECB will soon cut rates in a bid to kick-start growth in the region.
"The euro is in trouble because deflation has taken a tumble and euro zone economic data are on the soft side," economists at Citigroup C -0.23% wrote in a note to investors.
While Citigroup does not forecast a rate cut on Thursday, they do expect the ECB governing council to step up its rhetoric following the euro's three-month long rally, which has seen it gain some 6% against the dollar since late July.
Elsewhere, the Australian dollar rose against its U.S. rival, trading above $0.95 on the back of better-than-expected retail sales for September, up by 0.8% from the previous month.
The Aussie dollar traded at $0.9510 recently from Friday's level of $0.9458.
The Reserve Bank of Australia is set to meet Tuesday to decide on rates. Economists' consensus forecast calls for the key rate to be unchanged at 0.25%.
"The RBA's mild easing bias is likely to remain in place at this evening's policy announcement and statement. The short statement is likely to repeat that low rates are helping the economic transition, underpinning asset prices, confidence, and a mild upswing in housing construction," said Adam Cole, a currencies strategist at RBC.
Looking at the week ahead, markets could be vulnerable to short-term volatility as a number of central banks—including the Bank of England and the ECB—will deliver their rate decisions. On the data front, investors will watch closely the release of U.S. October nonfarm payroll employment data Friday. Economists expect the U.S. labor market to have added 120,000 jobs last month.
The WSJ Dollar Index, which measures the greenback against major rivals, declined to 72.86, off 0.2%.
In other action, the British pound rose to $1.5970 from $1.5926 late Friday. The dollar slid to ¥98.64 from ¥98.70.
