By Deborah Levine

The U.S. dollar dropped by the most in three weeks against the euro on Monday as renewed investor appetite for equities and other assets undercut safe-haven demand for the greenback.

Strategists said a recovery in overall sentiment despite Friday's weaker-than-expected U.S. retail sales data helped lift Asian and European equities, giving U.S. stock indexes reason to rise more than 1%.

A stronger-than-expected 0.8% monthly rise in April euro-zone industrial production on Monday added to positive sentiment, allowing the beleaguered single currency to extend a rebound.

The euro (CUR_EURUSD) rose to $1.2290, up from $1.2087 in North American trade late Friday, its biggest increase on a closing basis since May 21. The single currency hit a four-year low around $1.19 earlier this month.

The dollar index (DXY), which measures the greenback against a basket of major currencies, fell to 86.249 from 87.469 on Friday.

The greenback gained against the Japanese yen to buy  ¥91.77 (CUR_USDYEN), up from  ¥91.65 on Friday. The yen, like the dollar, tends to benefit from safe-haven flows and to fall when investors show increased willingness to move into riskier assets, including stocks.

"This is the first substantial upside correction in the euro in the better part of two months," wrote economists at Brown Brothers Harriman. "The euro's move above its 20-day moving average puts momentum traders on alert. While the next target comes in near $1.2300, given the extended positioning and the pace of the losses in recent weeks, a short-covering fueled recovery can exceed technical objectives."

On Friday, a stronger-than-expected rise in the University of Michigan's consumer-confidence reading helped kickstart risk appetite, strategists said.

Still, the euro looks likely to weaken against emerging market currencies and growth in the euro zone will be weak compared to many developed economics, according to Pimco.

"The euro will continue to weaken against emerging market currencies, reflecting relative growth dynamics in Europe versus better prospects in emerging market countries, portfolio manager Andrew Balls said in a note released Monday on the fund firm's web site.

The euro still doesn't look cheap against the U.S. dollar, he said.

"At minimum the euro-zone crisis is likely to deter investors, including government sector investors, from increasing their exposure in the euro-zone and could lead to a reduction in euro exposure," Balls said.

British pound, Korean won

A lower estimate for U.K. government borrowing helps the British pound (CUR_GBPUSD), which rose to $1.4796, up from $1.4521 Friday.

Britain's new independent watchdog lowered its estimate of U.K. borrowing needs ahead of Chancellor of the Exchequer George Osborne's emergency budget on June 22.

Attention on Tuesday will turn to May inflation data, which is expected to remain above the 3% mark on an annual basis for the fifth consecutive month.

That could begin to drive sterling-friendly expectations for the Bank of England to begin hiking interest rates more quickly than previously expected -- and more quickly than the U.S. Federal Reserve, the European Central Bank and the Bank of Japan, the BBH strategists wrote.

Meanwhile, the South Korean won (C_KRW) continued its wild ride to surge in Monday trading, with the U.S. dollar falling 2.4% to 1,220.33 won, down from 1,246.10 won late Friday and an intraday high of 1,270.10 won on Thursday, according to data from FactSet Research.

The volatility came after Seoul unveiled on Sunday new foreign-exchange trading regulations meant to stop such wild swings in the currency.

While earlier news reports signaling the currency controls had seemed to weigh on the won, a 1% gain in the benchmark Kopsi stock index was tagged as a reason for the unit's gains Monday.