The euro and other risk-sensitive currencies such as the pound held onto last week's gains Monday, but there was caution ahead of several key events later this week, including a key German legal ruling on the European Stability Mechanism and a U.S. central bank policy update.
The euro was recently trading at $1.2781 compared with $1.2817 late Friday in New York. The dollar was at ¥78 compared with ¥78.27, while the euro was at ¥100.05, compared with ¥100.26. The pound was trading at $1.6009 against the dollar, compared with $1.6010 late Friday in New York.
European equity markets and yields on Spanish 10-year government bonds were close to flat as the rally following the European Central Bank's announcement of its bond-buying plan Thursday failed to extend into the new week.
Analysts said the largest challenge facing the 17-country currency in the short-term is Wednesday's German Constitutional Court ruling on whether the euro-zone's richest and most powerful economy can participate in the ESM, Europe's permanent rescue fund.
"As long as the constitutional court provides a favorable ruling with regards to the ESM....that will be seen as a positive by the market and the euro will continue with its recovery," said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London.
But also on the agenda Wednesday are parliamentary elections in the Netherlands, where the focus will be on the country's capacity to form a new coalition government and keep to its fiscal targets.
More broadly, Thursday sees the conclusion of the U.S. Federal Reserve's two-day meeting, with expectations of more policy easing building heading into the meeting, particularly after weak jobs data Friday.
"Quantitative easing remains a close call even if the chances of it happening have increased. If it does, we think it would weaken the U.S. dollar and support risk appetite," said Barclays's foreign exchange research team.
In European trading hours Monday, the dollar was slightly firmer against the yen and the commodity-linked currencies of Australia and New Zealand.
The euro, meanwhile, continued to hold onto its gains against the Swiss franc ahead of Thursday's Swiss National Bank's quarterly interest rate-setting meeting.
Emerging market currencies also traded with a cautious tone, with the Polish zloty retracing some of Friday's gains against the euro.
The Wall Street Journal Dollar Index, which tracks the U.S. dollar against a basket of major currencies, was at 70.129 from 70.011.
