TOKYO—The dollar on Monday held its gains against other major currencies after news of the death of al Qaeda leader Osama Bin Laden, but the prospect of prolonged loose monetary policy and lingering debt problems in the U.S. limited any further rises ahead of a holiday in London.
The dollar was bought on the belief Mr. Bin Laden's death could make the U.S. less subject to further terrorist attacks, as he was regarded as responsible for al Qaeda's attack on Sept. 11, 2001. Mr. Bin Laden was killed in a targeted assault near Islamabad, according to a U.S. official.
Kurt Magnus, executive director of FX sales at Nomura in Australia, said the news means that optimism in the U.S. is set to rise. "This is a shot of adrenalin into the arm of the U.S. economy," he said.
The euro traded recently at $1.4793 against $1.4810 late Friday in New York. The dollar was at ¥81.55 from ¥81.12, while the euro was at ¥120.60 from ¥120.28. The U.K. pound was at $1.6681 from $1.6703.
The ICE Dollar Index, which tracks the U.S. dollar against a trade-weighted basket of currencies, was at 73.226 from 73.025. It earlier marked 72.813, its lowest level since July 2008.
Markets in Singapore and Hong Kong were closed on Monday, with London markets also set to be closed Monday for a national holiday. "The dollar gains were a bit exaggerated by thin market conditions," said Yoshio Yoshida, a trader at a Mizuho Trust and Banking Co.
Traders in Tokyo were also skeptical about a continued rally in the dollar after the Federal Reserve signaled last week it wouldn't tighten credit any time soon, even after completing its $600 bond-buying program in June, as planned.
Dai Sato, senior vice president at the foreign-exchange division of Mizuho Corporate Bank, said the Federal Reserve "will probably not be able to raise rates within this year," adding the Fed needs to reduce its assets first before a rate rise. "Any shift in U.S. monetary policy could be quite gradual," he added.
A dispute in the U.S. Congress over raising the ceiling for government debt is another concern for the dollar after the U.S. faced a near government shutdown in April.
"This has undermined trust in the dollar," said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch.
Meanwhile, the dollar's dip below ¥80 may raise caution among market participants over potential currency intervention by Japanese authorities, although coordinated intervention by G-7 nations like that seen on March 18 is unlikely, said Osamu Takashima, chief FX strategist at Citibank Japan.
"The situation was different back then when ripple effects were seen spreading globally following the earthquake in Japan," Mr. Takashima said.
"There is a risk of intervention but I wonder if there are good reasons for them to step in to the market for now amid a rise in the Tokyo stock market," said Mizuho's Mr. Sato, adding that "Japanese exporters can't yet benefit from a weaker yen "as their production capacity for export has been not restored.
Traders in Tokyo are keeping a close eye on a policy-setting meeting by the ECB Thursday, as well as U.S. April Jobs data due Friday, for clues on market direction over the next week.
"The market has started to feel that the ECB won't tighten credit in a hasty manner," said Mr. Sato. "The euro may face further downward pressure if Thursday's meeting reinforces such a view."
