New Zealand, Australian dollar lurks below highs as euro gasps for gas

Traders are holding their breath ahead of Thursday, when gas is supposed to resume flowing through the Nord Stream pipe from Russia to Germany after a shutdown for scheduled maintenance.

"If that doesn't happen, that would be a very bad thing for a lot of currencies," said Joseph Capurso, head of international economics at Commonwealth Bank of Australia, with the euro likely to be the biggest loser and the dollar a beneficiary.

The uncertainty is overshadowing a European Central Bank meeting, also due on Thursday, where policymakers are expected to begin Europe's hiking cycle with a 25 basis point (bp) increase.

The Bank of Japan meets on Thursday, too, though no policy changes are expected which could mean more pain for the beleaguered yen, while Japan has struck a lonely figure in pinning interest rates near zero.

Hike expectations firmed a little bit in Australia and New Zealand after data showing New Zealand's inflation hit a three-decade high last quarter was published on Monday.

At 7.3 percent year-on-year price growth beat expectations, lifted two-year swap rates nearly 10 basis points and raised the kiwi by 0.5 percent to a one-week high of $0.619.

The Australian dollar rose 0.3 percent to $0.68. Sterling drifted 0.2 percent higher to $1.18. The US dollar index was steady at 107.83, a bit more than 1 percent below last week's two-decade high of 109.29, though few seem willing yet to call a peak to the dollar's gains.

The Federal Reserve meets later in July and is expected to lift the benchmark US interest rate by 75 bps. Even though that is more conservative than the 100 bp hike markets had priced in at one point last week, it is still quite a stiff increase.

"There has been a fixation with how the dollar is poised to weaken," analysts at HSBC said in an outlook report which instead raised the bank's dollar forecasts broadly.

"There has been too much attention paid to the dollar's frailties but not enough to the increasing ones elsewhere, which are causing the dollar to be overvalued. Global growth is slowing and the downside risks are intensifying, which is USD positive. This dollar bull run is not over yet."