The dollar gained more than a cent Monday on the euro, which was pushed below $1.32 on news that the European Union would likely relax rules underpinning the currency and speculation that the U.S. Federal Reserve may move to more aggressive interest rate increases.
In afternoon trading, the euro was at $1.3190, down from $1.3311 in late New York trading on Friday. The dollar bought 105.38 Japanese yen, up from 104.68 on Friday, and the British pound dropped to $1.9006 from $1.9196.
Over the weekend, EU finance ministers came up with a plan to ease budget deficit limits that support the euro, which is supposed to be endorsed at an EU summit starting Tuesday.
The stability pact requires governments to limit deficit spending to 3 percent of gross domestic product, and imposes heavy fines and other penalties for violators. The new proposal sticks to the 3 percent rule but allows governments to invoke many reasons to escape immediate sanctions.
Meanwhile, the Hamburg-based HWWA, one of Germany's top six research institutes, on Monday revised its 2005 GDP growth forecast for the nation to 0.6 percent from 0.9 percent predicted in December due to poor economic growth at the end of last year and high oil prices.
The forecast, together with that of the Kiel-based think tank IfW, is the most pessimistic offered by the six research institutes. The other four forecast 2005 growth at between 1 percent and 1.9 percent.
The euro skyrocketed against the dollar last year, jumping from about $1.20 in September to an all-time high of $1.3667 at the end of December on worries over the ballooning U.S. trade and budget deficits.
It has since been hovering around the $1.33 mark, and gained ground last week on news of a record U.S. current account deficit. Markets pushed the dollar back up, however, as they looked ahead to Tuesday's meeting of the U.S. Federal Reserve, at which the central bank is widely expected to raise interest rates.
The focus is on whether the Fed continues to say it will raise borrowing costs at a "measured" pace or signals that it is prepared to raise rates more quickly, as has been widely speculated.