The dollar jumped Monday against the euro to its highest level since March on European financial sector concerns and after receiving rare Russian backing.
Investors also sought the safety of the dollar amid a global stock market selloff on weekend warnings by Group of Eight finance chiefs that the economic outlook remained risky and uncertain despite signs of the global crisis bottoming out.
The euro slumped to 1.3793 dollars at around 2100 GMT in New York trading from 1.4021 dollars on Friday.
The dollar however drifted lower to 97.83 yen from 98.40 yen on Friday.
"The primary theme in the currency markets today was the recovery in the US dollar as the greenback staged its strongest rally against the euro since March," said Kathy Lien, director of currency research at Global Forex Trading.
She said the dollar had been "deeply oversold and was due for a serious bounce."
Russian Finance Minister Alexei Kudrin also gave a boost to the dollar after he said at the G8 meeting of finance ministers and central bank chiefs in Italy that the greenback's role as the world's main reserve currency was unlikely to change in the near future.
"The big story on Monday seemed to come out of Russia, with the USD benefiting across the board after the government reaffirmed its support for the USD as the reserve currency of choice," said currency strategist Joel Kruger of Forex Capital Markets.
Terri Belkas, another strategist from the same group, said the dollar also strengthened after the European Central Bank said commercial banks in the region may stand to lose another 283 billion dollars by 2010 due to write-downs.
"Indeed, European banks have not been as quick to realize losses as US banks have, suggesting that negative news for the European financial sector is likely to seep out for quite a while longer," she said.
The International Monetary Fund meanwhile said it considered the dollar slightly overvalued, since it "is presently only modestly above the level implied by medium-term fundamentals."
But it noted "much will also depend on the evolution of foreign demand for US assets, underscoring the importance of fiscal and financial market reforms."
The latest US Treasury data showed that net overseas purchases of US long-term securities dropped to 34.3 billion dollars in April from 56.4 billion dollars the previous month.
Brian Bethune, an economist with IHS Global Insight, said it underscored a "rebalancing of risk perceptions" and "should not raise too many alarm bells." The Treasury report said that mainland China's Treasury bond holdings fell in April for the first time in 11 months but Beijing remains the biggest holder of US bonds.
The dollar also rose Monday to 1.0920 Swiss francs from 1.0789 on Friday .
The pound fell to 1.6312 dollars from 1.6442.