The US dollar rose against the euro and the pound on Monday, as currency investors, wary of turmoil in the markets, backed away from investing in high-yielding currencies with the yen and Swiss franc.
The yen-carry trade involves selling off the low-yielding Japanese currency in favor of currencies in countries with higher interest rates.
The dollar bounce was "a corrective upward move," said Ashraf Laidi, chief currency analyst at CMC Markets US "This is not a reflection of an improving landscape for the US dollar."
The euro bought US$1.4554 late in the afternoon, down from US$1.4673 on Friday and well below its all-time record of US$1.4752, reached earlier in Friday's session.
The British pound, which has been trading at its highest levels against the dollar since the early 1980s, sank to US$2.0595 from US$2.0909
The unwinding of the yen-carry trade sent the yen higher, with the dollar falling as far as ?109.13 -- its first time below ?110 for a year and a half -- before climbing up to ?110.05, below the ?111.07 it was worth on Friday, Dow Jones' Interbank foreign-exchange rates showed.
"Losses in the stock market in the US were broadening beyond just financial stocks" to technology stocks last week, Laidi said, kicking off the carry trade's decline.
"Now there is uncertainty that the losses we saw in US equities will not be confined only to US banks and tech stocks, not only US institutions but also the rest of the world," he said.
Asian markets fell sharply on Monday as Wall Street ended last week down and major banks warned of ongoing credit-related problems.
The Canadian dollar continued Friday's decline against the US dollar, trading at C$0.9645 on Monday, down from US$0.9415 Canadian cents.
The commodity-backed Canadian currency benefits when prices of Canada's exports, such as oil and gold, rise.
Oil and gold prices retreated from recent upward charges as carry trades unwound as fears of global economic slowdown tamped interest-rate differentials trading.
No US economic data were expected on Monday, Veterans Day, to help the markets gauge the direction of the economy and interest rates.
The dollar has been suffering from speculation that the Fed, which recently cut rates twice, may keep doing so even as its major European counterparts have held their rates steady.
However, Paul Jackson, a senior forex dealer at CMC Markets, said the dollar "is regaining some significant ground against the pound as sliding business confidence seems set to pave the way for a rate cut at the Bank of England."