LONDON (MarketWatch) -- The U.S. dollar was on the defensive Monday, losing ground against the Japanese yen and the euro as rising risk appetite lifted Asian and European equities.
Asian markets shrugged off a steeper-than-expected drop in the Bank of Japan's tankan index, a closely-watched business-confidence gauge. Tokyo's Nikkei jumped more than 5%. See Asia Markets.
The rebound took back most of the losses scored in Tokyo Friday, when Asian equities plunged following the collapse in the Senate of a legislative package to bail out the auto industry.
The Bush administration later indicated it would weigh stepping in to provide a lifeline to the automakers. That allowed U.S. stocks to close higher Friday and set the stage for Monday's rebound in Asia, said strategists at BNP Paribas.
Although questions remain about how the administration will fashion a rescue, investors were willing to put on new positions, they said.
But the strategists urged caution in buying the euro or the British pound versus the dollar. They warned that the Federal Reserve's expected half-point rate cut this week, along with the potential for quantitative-easing measures, could lead U.S. asset markets to outperform, supporting the dollar.
The greenback bought 90.51 yen, down from 90.97 yen in North American trade late Friday. Earlier Friday, the dollar plunged to a 13-year low versus the Japanese currency around 88.10.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, fell to 83.164, down from 83.662.
The euro traded at $1.3448, up from $1.3374. The British pound rose slightly to $1.4949 from $1.4933.
The BOJ tankan survey found confidence among large manufacturers fell at its fastest pace since 1974, signaling a deepening recession for the world's second-largest economy. See full story.
Strategists at Commerzbank said the data underscored the dilemma faced by Japanese authorities.
With the BOJ's official interest rate at 0.3%, there is little room for further monetary easing, they said. And fiscal stimulus measures may not have the desired effect due to the tendency of Japanese consumers to save rather than spend.
"Against this backdrop, Japan might return to a policy of intervention in the currency market to end the recent surge in the value of the yen," the Commerzbank strategists wrote. "Therefore, further yen strength is not very likely."
