The U.S. dollar weakened in early European trade Monday, while the euro jumped to a three-week high as traders reassessed the European Central Bank's interest rate trajectory in the wake of last week's jumbo rate hike.

The European Central Bank raised its key deposit rate to 0.75% from zero last week, its largest ever hike, and President Christine Lagarde guided for another two or three hikes in an attempt to bring inflation at record levels back to the bank's targeted 2%.

This guidance for further aggressive monetary tightening has pushed the euro higher against the dollar, with EUR/USD up 1.2% to 1.0154, close to its highest level in three weeks.

"Thursday's step was a clear sign and if the inflation picture stays the same, further clear steps must follow," Bundesbank President Joachim Nagel said in a radio interview on Sunday.

The ECB officials see a rising risk that they will have to raise their key interest rate to 2% or more, at least another 125 basis points of hiking, to curb record-high inflation in the Eurozone despite a likely recession, Reuters reported Monday.

The single currency has also been boosted by the news of substantial territorial gains made by Ukrainian troops over the weekend, raising the potential, however remote, of an early end to Russia's invasion of Ukraine.

Gross domestic product fell by 0.6% in June, which included two days of public bank holidays to celebrate the late Queen Elizabeth's 70 years on the British throne.

The Federal Reserve meets next week and is widely expected to hike interest rates by a substantial amount once more.