Dollar's rate hike rally fizzles as China fears weigh

The dollar slipped in Asia Monday on fears that China's economic malaise could drag on global growth, reversing a rally that had been fuelled by hopes for a September Federal Reserve rate hike.

In Tokyo, the dollar weakened to 121.06 yen from 121.52 yen late Friday in New York.

The euro rose to $1.1236 and 136.01 yen from $1.1188 and 135.97 yen in US trade.

Speaking at the weekend on the sidelines of the Fed's central banking symposium in Jackson Hole, Wyoming, Fed Vice Chairman Stanley Fischer acknowledged that the turmoil rooted in China had raised some questions about the economic situation, even if US data remains good.

"The change in the circumstances which began with the Chinese devaluation (of the yuan) is relatively new and we are still watching how it unfolds. So I wouldn't want to go ahead and decide right now," he said in a CNBC interview.

"We are dealing with something which happened about 10 days ago, particularly the change in the circumstances. We've got a little over two weeks before we make the decision and we've got time to wait and see the incoming data and see what exactly, what is going on now in the economy."

Fischer's remarks were taken as a sign that the US central bank was still considering a rate lift off as early as next month.

Higher rates tend to boost the dollar as investors seek out higher-yielding assets.

But on Monday renewed concerns about China set in as markets look ahead to the release of manufacturing data this week

Some economists tipped a contraction in activity August, which would be the first since February, according to Bloomberg News.

"We have no doubt that financial market volatility will have as much or more bearing than economic data volatility on the Fed's 17 September policy decision," National Australia Bank said in a commentary.

"In this respect we have to be mistrustful that the strong resurgence in Chinese stock prices will hold."

Shanghai sank 2.61 percentby the break Monday. The index plunged more than 16 percent from Monday to Wednesday before bouncing 10 percent in the next two sessions.