The euro consolidated gains on Monday after hitting a two-month high in early Asian trades as a deepening selloff in Chinese stocks prompted investors to take profits on some long bets.

Heavy selling of blue-chip shares dragged China's stock markets sharply lower on Monday as rising bond yields spooked investors. But the fallout seemed to be limited to the mainland with Hong Kong's stocks lagging the drop there and overseas bonds relatively more stable.

“The Chinese stock market drop is reminiscent of the selloff that we saw in the summer of 2015 and that is causing some investors to become cautious going into the thin year end markets,” said Viraj Patel, an FX strategist at ING in London.

The euro fetched $1.1944, little changed from late US levels last week after having hit a high of $1.1946, its highest level in two months.

The euro notched its biggest weekly performance in more than two months last week as some hedge funds bought the single currency in holiday-thinned trades last week, triggering some stop losses.

The common currency now faces a test at $1.1965. That level is the 76.4 per cent retracement of its decline from a 2 1/2-year peak of $1.2092 touched on September 8 to a 3-1/2-month low of $1.1553 set on November 7. It has gained 3.2 per cent from that low.

German business confidence

The German business confidence index compiled by the Ifo economic institute hit a record high in November, in another sign of strong growth in the euro zone's largest economy.

Political lifeline

The upbeat data was followed by positive political developments after German Chancellor Angela Merkel - whose chances for a fourth term were plunged into doubt a week ago when three-way coalition talks with the pro-business Free Democrats and Greens collapsed - was handed a political lifeline by the Social Democrats.

In contrast, the dollar lacked momentum of its own as persistently low inflation is seen as undermining the case for the Federal Reserve's rate hikes.

Fed Chair nominee

Market players are looking to the congressional hearing on Fed Chair nominee Jerome Powell on Tuesday.

The dollar index edged lower to 92.651, near two-month low of 92.675 touched on Friday. Sterling fetched $1.3329, holding near Friday's two-month peak of $1.3360.

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