Sterling retreated as traders booked profits on recent gains tied to optimism about a Brexit deal. Nervous investors piled more money into the dollar, as speculators' bullish bets in the greenback grew to their highest level since December 2016 last week.
On Monday, Italian 10-year bond yield increased nearly 20 basis points to 3.60 percent, the highest level in 4-1/2 years, while the country's stock market fell to its weakest since April 2017.
"The confrontation is set to escalate, and this is hurting Italian assets," Marc Chandler, chief market strategist at Bannockburn Global Forex in New York said of the tension between Italy and the regional economic bloc.
Italian Deputy Prime Minister Matteo Salvini, speaking at a media conference with French far-right leader Marine Le Pen, denounced European Commission President Jean-Claude Juncker and Economics Commissioner Pierre Moscovici as enemies of Europe.
The single currency fell 0.3 percent against the dollar to $1.149 and not far from a more-than one-year low of $1.1355 hit in mid-August. The euro fell 0.2 percent to 1.1406 Swiss franc, and shed 0.8 percent against 130.02 yen.
China's central bank on Sunday announced a steep cut in the level of cash that banks must hold as reserves, marking the fourth such decrease this year.
Meanwhile, the pound fell 0.3 percent to $1.3074, wiping out all of its gains last week, as markets focused on any substantial breakthrough in Brexit negotiations as Britain moves nearer to an exit deal with the European Union.
EU Brexit negotiators believe a deal with Britain on leaving the bloc is "very close," sources said, in a sign that a compromise on a major sticking point - the future Irish border - might be in the making.
In the meantime, the dollar continued its recent march higher on upbeat domestic economic data and safe-haven demand amid geopolitical concerns. An index that tracks the greenback against a basket of major currencies was up 0.1 at 95.75.