The euro traded at $1.187 at 2100 GMT, up 0.0024 from Friday's four-year high.

The 16-month-long rally was described by the European Central Bank's chief economist as a "correction" on Saturday.

"We are now significantly closer to normality than we were two years ago," ECB chief economist Ottmar Issing told Germany's n-tv channel.

Investors looking for higher returns in times when interest rates of leading economies are low have fuelled the euro's rise.

The US Federal Reserve's key interest rate is at a four-decade low of 1.25%, while the ECB's is 2.5%.

New highs

Traders are predicting the euro will hit $1.20 this week after the US and UK markets reopen on Tuesday.

"The market is very quiet," said Credit Suisse First Boston currency strategist Satoru Oogasawara.

The euro reached $1.1832 on Friday, just short of its peak of $1.1884 from 4 January 1999, four days after it launched.

The 12-nation currency slumped to an all-time low of $0.823 on 26 October 2000.

US policy

The dollar's slide has been also fuelled by a combination of the US administration softening of its strong-dollar stance and huge US fiscal and current account deficits.

But the euro's strength is not good news for the eurozone economies.

The US Government appears content with the weak dollar, as it is stimulating the US export sector, to the detriment of many in Europe.

But Mr Issing said he expected the European economy to pick up in the second half of this year.

"It won't be as though a motor that is idle suddenly runs at full speed - it will be a more gradual process," he said.