The dollar edged lower after investors reacted negatively to an international bailout package for Cyprus that raised concerns about fresh upheaval in the eurozone.
The eurozone has taken the unprecedented step of proposing a new levy on deposit holders in Cyprus to help cover the costs of a bailout, sparking fears of a run on banks.
"It was not just the Cyprus debt itself that upset markets today, but more so the connotations this situation may have when it comes to other more significant bailouts that may be required in the region," said Tim Waterer, currency trader at CMC Markets.
"With a potential spanner thrown in the works of the eurozone recovery, risk assets were on the retreat today with traders awaiting clarification of the longer term impact this may have."
At 3.37pm AEDT, the Aussie fetched $US1.0366 compared with $US1.0371 on Friday. It traded at a session high of $US1.0375 in Asia.
"The resistance to watch in the Australian dollar remains at Friday's highs of $US1.0410/$US1.0420," Macquarie strategists said in a note.
"This area corresponds to the 61.8 per cent retracement of the decline from $US1.06 to $US1.011 and it needs to hold if there is a chance of the pressure returning to the downside in the short term."
Traders are also looking to the release tomorrow of minutes from the Reserve Bank of Australia's March 5 meeting for further insight into policymakers' decision to keep rates steady at 3 per cent.
At the time, they cited an improvement in domestic economic conditions as a reason to keep rates on hold, prompting traders to trim expectations of further cuts.
But events beyond Australia's shores would likely be in closer focus, said Commonwealth Bank of Australia strategists in a note.
"Offshore developments should remain the key driver of the Australian dollar," they said.
The US Federal Reserve's Open Market Committee is due to meet later this week. While policymakers are expected to retain their ultra-loose settings, the market will waiting to seize on any commentary from Fed chairman Ben Bernanke that economic conditions are improving.
"A dovish FOMC should prove to be Australian dollar supportive," the CBA strategists said.
"Over the course of 2013, we think the combination of a robust Asian economic outlook, strong demand for Australian dollar denominated assets, Australia's ongoing relative yield advantage and low volatility should prove to be Australian dollar positive."
