Dollar nurses losses as carry trades flourish

The U.S. dollar nursed losses at a 10-month low against a basket of currencies on Monday as investors cheered upbeat Chinese data by piling into leveraged positions such as the Australian dollar and other high-yielding currencies. 

Some of the biggest gains were seen in the yen crosses such as sterling, which was up 0.1 percent on the day as investors added bets that U.S. interest rates would rise very gradually in the coming months after the latest data.

"Risk outlook remains positive after the latest figures and markets are looking to add positions especially in the high-yielding names," said David Madden, a strategist at CMC Markets. 

China's second-quarter gross domestic product topped forecasts with a rise of 6.9 percent on the year, while retail sale and industrial output were both strong. 

The Aussie shot to a two-year high and breached major chart resistance in the process in the $0.7700/7778 range. The Aussie was last at $0.7814 with bulls targeting the 200-week moving average around $0.8018

U.S. rate hike expectations have been pared to less than a 50-percent probability after the latest inflation print on Friday and with no top-tier data this week, markets have plenty of time to mull over the future direction of interest rates. 

The repeated disappointment on prices cast a question mark over the Federal Reserve's confidence that inflation would soon rebound. 

Latest positioning data suggest markets are also turning bearish on the dollar with the first U.S. dollar shorts evident since May 2016. However, carry trades are flourishing with Japanese yen shorts at its highest level since June 2015. 

The dollar was trading broadly flat at 112.575 against the yen.