The dollar kicked off the week on a downbeat note and stock markets rose as traders priced in a narrowing of policy divergence between the US Federal Reserve and other big central banks.

An index measuring the greenback against six peers slid 0.8 per cent, trimming steeper declines earlier in the session. The euro rose 1 per cent to trade above parity with the US currency at $1.013. The pound also climbed by 1 per cent to $1.17.

The euro has fallen by more than a tenth this year, while the dollar is up about 13 per cent — with the latter propelled higher by aggressive interest rate rises and hawkish messaging from the Fed about the future path of monetary policy.

The European Central Bank last week lifted borrowing costs by 0.75 percentage points to 0.75 per cent, and pointed to further increases to come — signalling a more assertive approach to tackling inflation in the common currency region.

The catalyst for the dollar’s decline, which had also edged lower on Friday, “seems to be the ongoing hawkishness of the ECB and the rebound in risk appetite”, wrote Jonathan Petersen, a senior markets economist at Capital Economics.

The dollar has historically been seen as a haven asset during times of economic stress. “We have a lot of traditional investors hiding in dollar assets; the stronger it becomes, the more they hide,” said Mark Tinker, chief investment officer at Toscafund Asset Management Hong Kong. “That means there are a lot of people who are nervous about the dollar turning.”

Wall Street shares advanced on Monday morning in New York, with the broad S&P 500 up and the tech-heavy Nasdaq Composite both gaining 1.1 per cent.

“You have a strong negative correlation between the dollar and the US stock market, with lots of multinationals having lower earnings when the dollar appreciates,” said Bastien Drut, chief macro strategist at CPR Asset Management.

European stocks also made gains on Monday. The regional Stoxx 600 closed up 1.8 per cent, while Germany’s Dax index finished the day up 2.4 per cent and London’s FTSE 100 added 1.7 per cent.

Investors will scrutinise fresh US inflation data due on Tuesday for clues about the future path of rate rises in the world’s largest economy. Analysts polled by Reuters expect August’s consumer price index to register a reading of 8.1 per cent year on year, down from 8.5 per cent in July.

A lower than forecast CPI figure — helped in part by falling petrol prices in the US — could reduce estimates of how far the Fed will hoist interest rates, in turn weighing on investor sentiment towards the greenback. By comparison, Europe remains in the grip of an energy crisis that has stoked inflationary pressures.

In the US “according to our forecast, inflation has peaked and . . . lower oil prices provide support for further falls going forward”, wrote analysts at SEB. CPI figures are also due this week in the UK, with economists polled by Reuters expecting a slight monthly rise in inflation.

Markets are pricing in the probability of a 0.75 percentage point interest rate rise at the Fed’s next monetary policy meeting in late September, which would mark the third consecutive increase of such magnitude. The central bank’s current target range stands at 2.25 per cent to 2.50 per cent.

Fed governor Christopher Waller on Friday backed “another significant increase” in interest rates this month, speaking on the final day that the central bank’s officials can make public remarks before the upcoming policy meeting.

In Asian equity markets, Japan’s Topix rose 0.7 per cent. Markets in Shanghai, Shenzhen, Hong Kong and South Korea were closed for the Mid-Autumn Festival holiday.

Additional reporting by Hudson Lockett in Hong Kong