The U.S. dollar slumped to the lowest level in three years on foreign exchange markets Monday as investors continue to favor other currencies and commodities even in the face of three expected interest rate hikes from the Federal Reserve.

The dollar index, a measure of the greenback's strength against a basket of six global currencies, was marked at 90.44 in European trading, down 0.65% from its Friday close to the lowest level since January 2015. The moves helped lift regional currencies in Europe to similar near-term peaks, with the euro hitting 1.2296, the highest since December 2014, and the pound topping 1.38 for the first time since the country voted to leave the European Union in June of 2016.

"We suspect that the resumption of USD weakness was an extension of the reaction to the more hawkish than expected ECB minutes and the rather dramatic lifting of forward ECB rate expectation as well as the resumption in the yuan's sharp appreciation," said Saxo Bank FX strategist John Hardy.

The euro, which has the biggest influence on the dollar in the index basket, has risen nearly 3% over the past three trading session after minutes from the European Central Bank's December policy meeting suggested the Bank could alter its forward guidance on interest rates now that the region's recovery has accelerated to the fastest pace in nearly a decade. 

The gains were supported by news that Angela Merkel's Christian Democrats have reached a deal with their socialist rivals that will put the two sides at the negotiating table for formal talks to form a coalition government in Europe's biggest and most important economy. Germany has been running under a caretaker administration since September's federal elections failed to deliver a decisive mandate for Merkel amid a troubling rise in support for far-right nationalists.

Saxo also noted that non-commercial investors have increased bets against the dollar to around $9.2 billion in the week ending Jan. 9

The dollar's weakness Monday may also be linked to a revelation from Andreas Dombert, a member of executive board of the Bundesbank, that Germany's powerful central bank will begin adding China's yuan to its official currency reserves. 

The yuan hit a two-year high of 6.4566 against the dollar Monday, following Dombret's comments to a financial forum in Hong Kong, a move that could ease some of the expected pressure from Washington after its trade surplus with the United States swelled to a record $275.81 billion last year, according to December data from China's customs office.

On top of that, ING's FX strategist Viraj Patel thinks the dollar's decline still has more room to run.

"We would still characterise this as a benign decline, (ie.driven by growth opportunities overseas) rather than a painful adjustment on, say, the threat of US protectionism," said ING . "There is enough good news in the rest of the world to keep the dollar on the back foot and a quiet week for US data looks unlikely to change the trend."

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