NEW YORK (Reuters) - The dollar slipped on Monday from a 10-week peak against a basket of currencies as the euro strengthened and U.S. stock prices faded from their initial highs.
The euro was buoyed by data showing German industrial output notched its biggest monthly increase in more than six years in August. Comments from European Central Bank Executive Board member Sabine Lautenschlaeger calling for the ECB to roll back asset purchases in 2018 also boosted the single currency.
Signs that the Federal Reserve may raise key borrowing costs for a third time in 2017 and that U.S. President Donald Trump's tax plan might be back on track have fuelled the dollar index's near 3 percent recovery from a more than 2-1/2-year low in the past month.
But some analysts said the greenback's recovery will be limited as U.S. economic growth remains modest and overseas central banks are considering either raising interest rates or reducing their bond purchases.
"We see some further dollar strength from a possible December rate hike, but the upside is limited because the dollar is an overall trend of long-term weakness," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.
Another factor that could cap further dollar gains is the tension between the United States and North Korea.
On Saturday, Trump said "only one thing will work" in dealing with Pyongyang. He did not make clear what he was referring to, but the comments seemed to suggest that military action was on his mind.
The dollar index, which measures the greenback against a basket of six other major currencies, on Friday hit 94.267 <.DXY>, its highest since July 20, after data showed a stronger-than-forecast increase in average hourly earnings last month.
The index was down 0.1 percent at 93.668 on Monday.
Interest rates futures implied traders saw an 88 percent chance the Fed would raise rates in December <FFZ7> <FFF8>, according to CME Group's FedWatch programme.
The euro edged up 0.1 percent at $1.1748 <EUR=> and was 0.2 percent higher at 132.39 yen <EURJPY=>.
Currency trading volume was light due to holidays in Japan, Canada, South Korea and the United States.
Wall Street stock prices were little changed after the Dow and Nasdaq reached record highs in early trading.
Sterling was the biggest mover among developed-market currencies, recovering as much as 0.9 percent <GBP=D3> on signs that a plot to topple Prime Minister Theresa May would not be successful, easing political uncertainty.[GBP/]
The pound <GBP=D4> was last up 0.7 percent at $1.3155.
(Additional reporting by Jemima Kelly, John Geddie in London and; Masayuki Kitano in Singapore; Editing by Susan Thomas and Meredith Mazzilli)
