The dollar began the week under pressure on Monday, on track for monthly losses but off recent lows as investors kept alive hopes that the U.S. Federal Reserve would raise interest rates as early as next month. The dollar index .DXY, which tracks the greenback against a basket of six rival currencies, was at 95.704, down 0.4 percent on the day and about 1.7 percent lower for the month. But it was well above a seven-month low of 92.621 plumbed a week ago as fears of a sharp economic slowdown in China sent global equities markets plunging. The dollar slid 0.6 percent to 121.01 yen JPY=, down about 2.3 percent for August, but well above a seven-month low of 116.15 touched a week ago. The euro rose 0.6 percent to $1.1249 EUR=, below last week's high of $1.1715 but still up 2.4 percent for the month. A rise in risk aversion has triggered short-covering rallies this month in the yen and the euro, which are popular funding currencies for carry trades. Such trades involve selling low-yielding currencies to fund investment in higher-yielding currencies and assets. Renewed weakness in equities on Monday dragged the dollar lower versus the yen and the euro, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore. "I think we will move around the nuances of the stock market, particularly the S&P and the Shanghai Composite," he said, referring to trading during Asian hours on Monday. U.S. S&P futures were down 1.3 percent ESc1, while MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1.2 percent .MIAPJ0000PUS and Shanghai shares were down 2.6 percent .SSEC as of 0412 GMT. Investors awaited the key non-farm payrolls data on Friday for clues on whether the Fed would take its long-awaited step to raise interest rates as soon as its mid-September meeting. U.S. business surveys, factory orders and trade data will also be released this week. While the dollar could get a boost if such U.S. data bolsters expectations for a Fed rate rise within weeks, another focus is whether equities and risk sentiment will hold up under such a scenario. "We think September liftoff is not necessarily bad for risk sentiment," said Tan Teck Leng, FX strategist at UBS Wealth Management in Singapore, adding that further interest rate increases by the Fed are likely to occur gradually and Fed Chair Janet Yellen will probably err on the side of dovishness. "Given this view, we still maintain a view that markets will be risk-friendly, and hence look for further yen and euro weakness versus the dollar leading up to the first Fed rate hike," he added. Fed Vice Chairman Stanley Fischer said in a speech at the annual central bankers' meeting in Wyoming on Saturday that U.S. inflation will likely rebound as pressure from the dollar fades, allowing the Federal Reserve to raise interest rates gradually. "The release of U.S. ADP employment on Wednesday and non-farm payrolls on Friday will be key in analyzing the quantum of a September rate hike," Angus Nicholson, market analyst at trading services provider IG in Melbourne, wrote in a note to clients. The latest data from the Commodity Futures Trading Commission released on Friday showed speculators pared back bullish dollar bets in the latest week to their smallest in more than two months.
