The dollar rose against a basket of currencies on Monday and pulled away from a 10-month low, with market players saying its short-covering bounce may have more room to run given the recent build-up of bets against the dollar. The greenback extended a rebound that started late last week, with the euro retreating further from an eight-month high and the Australian dollar [AUD=X 0.9831 -0.0073 (-0.74%) ]backing off from Friday's peak above parity that was the highest since it was floated in 1983. Traders said short-term speculative and model accounts were active in the Asian session as the euro fell 0.8 percent to test support at $1.3865. Next downside targets are channel support at $1.3825 and then the Oct.12 low of $1.3775. The dollar index [.DYX Unavailable () ], which rose 0.3 percent to 77.321, was seen as needing a move above its Oct.12 high of 77.93 to signal a short-term bottom may be in place after Friday's 10-month trough of 76.144. Investors had increased their bets against the dollar in recent weeks on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November. That positioning had pointed to the risk of a short-covering bounce in the dollar. "I think everyone was just looking for some kind of trigger. The only question had been one of timing," said Tsutomu Soma, senior manager for Okasan Securities' foreign securities department. Market players were likely trimming back their bets against the dollar ahead of a forthcoming G20 meeting and before hedge funds' book closings at the end of November, Soma said. The euro [EUR=X 1.3863 -0.0111 (-0.79%) ] shed 0.6 percent on the day to $1.3893, pulling away from its highest in more than eight months of $1.4161 hit on trading platform EBS on Friday. Data from the U.S. Commodity Futures Trading Commission showed speculators trimmed bets against the dollar in the latest week but still had hefty wagers against it. The value of the dollar's net short position slipped to $29 billion in the week ended Oct.12, down from a net short of $30.5 billion in the previous week, the biggest bet against the dollar since at least June 2008. Chartists say the dollar index needs to hold above rising trendline support which comes in at about 76.00 at the moment if it is to avoid an eventual test of its 2009 low of 74.17. "Expectations of QE2 are fully priced in for November or December. Questions remain exactly on the extent of that QE2," said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong. "Overall, with the downside and the bad news pretty much fully factored in for the U.S. dollar, the risk is towards more of a dollar squeeze, especially given how skewed positioning is ultimately," Trinh added. Dollar and Treasury Yields The Australian dollar fell 0.5 percent to $0.9854. The Aussie rose to $1.0004 on Friday, climbing above parity for the first time since it was floated in 1983. A senior trader for a major Japanese bank said the dollar could draw support in the near-term if longer-term U.S. Treasury yields continue to rise after climbing late last week. The dollar's moves have recently been highly correlated with 10-year Treasury yields. For example, the 90-day correlation between the 10-year Treasury yield and the dollar index is now at 0.77, near a peak hit earlier in October that was the highest since April 2009. "I think there is a good chance that we may see a pull-back in European currencies and the Australian dollar," the senior trader said. Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further, and the U.S. yield curve steepened as investors bet the Fed would be successful in generating more inflation. MACD, a technical indicator used to gauge short-term trading momentum, is now flashing a sell signal for both the euro and the Australian dollar, pointing to the potential for a further pull-back in those currencies. The dollar dipped 0.3 percent to 81.25 yen, edging back towards a 15-year low of 80.88 yen [JPY=X 81.22 -0.18 (-0.22%) ] hit on EBS last week. The senior trader said that, while the potential for yen-selling intervention remained, he harboured doubts about just how strongly Japanese authorities may feel the need to do so, given that the yen's recent rise could be blamed on broad dollar weakness. Some market players have also speculated that Tokyo may prefer to avoid intervention ahead of a Group of 20 finance ministers' meeting in South Korea from Oct.22.

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