(Reuters) - The dollar fell against most currencies, while the yen dropped to its lowest in nearly four weeks versus the greenback on Monday as better-than-expected economic data from Europe and Japan lifted risk sentiment and prompted investors to seek assets with higher returns. The manufacturing reports out of the euro zone, Japan, and the UK all showed improvement, lifting the euro and other riskier currencies such as the Australian and New Zealand dollars. There were also encouraging signs out of the debt-burdened peripheral countries in Europe such as Spain and Italy. "The news out of Europe was the first tangible proof of improving economic activity in the periphery economies and indicates that the region may be finally starting to turn towards growth as the summer progresses," said Boris Schlossberg, managing director of FX strategy, at BK Asset Management. Data from the euro zone showed that the manufacturing purchasing managers' index hit a 16-month high, suggesting a downturn in the sector was easing. British manufacturing, meanwhile, grew at its fastest pace in more than two years, while sentiment among Japan's manufacturers improved markedly. In early New York trading, the dollar was up 0.6 percent at 99.65 yen after hitting a peak of 99.74, its highest since June 5. Traders said a reported options expiry at 99.50 yen may keep the dollar close to that level. Stop loss buy orders were cited above 99.60 yen. Expectations the Bank of Japan will continue with aggressive monetary easing weighed on the yen, with the euro up 0.8 percent at 129.90 yen, having earlier hit a near three-week peak of 130.07 yen. The euro was up 0.2 percent at $1.3033, recovering after a dip last week to $1.2983, its lowest since early June. But it stayed below chart resistance at $1.3106, the 100-day moving average, and the 200-day average at $1.3074. Against the yen, the euro rose 0.8 percent to 129.98 yen. The dollar index .DXY, which measures the dollar's value against a basket of major currencies, was steady at 83.118, having hit a four-week peak of 83.344 on Friday. Friday's U.S. payrolls report will be key. A strong reading would boost the dollar by fanning speculation about an early paring back of the Fed's $85-billion-a-month bond-buying. "This prevailing tone of dollar-positive sentiment is set to remain as the uncertainty around Fed tapering, which put a lot of pressure on the dollar, is more or less gone," said Lutz Karpowitz, currency analyst at Commerzbank. Rising yields and an improving domestic economy give the U.S. currency a big advantage over the euro and yen. In contrast to the Fed, the European Central Bank is likely to emphasize at its monthly meeting on Thursday that the euro zone economy still needs help. The Bank of England and the Reserve Bank of Australia also hold policy meetings this week. The Australian dollar hit a three-year low of US$0.9105 before recovering to last trade at US$0.9186, up 0.5 percent. The pound edged up 0.1 percent at $1.5226. (Additional reporting by Jessica Mortimer in London; Editing by Chris Reese)

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