The euro was on track for its biggest one-day decline since September as German inflation eased in December, while the US dollar strengthened to a two-week high as focus shifted to the Federal Reserve's minutes from its December meeting.
The euro was last down around 1.3% against the dollar at $1.0526, its lowest level since December 12 and on track for its biggest daily drop since September 23 last year.
German state inflation data showed a drop in prices leading to indications that the country's inflation may also slow for a second month driven in part by a one-off payment by the government for household energy bills.
According to Scotiabank's chief currency strategist, Shaun Osborne, he is of the view that German inflation is unlikely to prevent the ECB from implementing a relatively aggressive tightening policy in the coming months.
Investors' attention this week will also be on the minutes of the Fed's December meeting scheduled for release on Thursday with investors looking for clues on interest rates.
U.S. central bank raised interest rates by 50 basis points last month after deciding on four consecutive 75 basis point hikes, but signaled it may need to keep rates higher for longer to tame inflation.
The US dollar index, which measures the US dollar against six major currencies, traded up 0.71% to trade at 104.00.
The yen, which hit a seven-month high during Asian trading hours, last traded slightly weaker at 130.83 per dollar.
Speculation that the Bank of Japan would begin to move away from its ultra-loose policy was sparked last December when the central bank widened the range of yield limits on 10-year Japanese government bonds.
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This was further fueled by a Nikkei report on Saturday that the BOJ was considering raising its inflation forecast in January.
Sterling last traded at $1.1933, down 1% on the day, briefly touching its lowest level since November 30 last year.
Meanwhile, China's factory activity declined for a third month in a row in December and at the fastest pace in nearly three years as the Covid-19 infection hit output after Beijing dramatically reversed anti-virus measures.
