The yen fell broadly on Monday as further evidence that the global economy may be over the worst of the recession lifted equities and stoked demand for currencies seen as higher risk such as the Australian dollar.
However, the euro cut earlier gains against the dollar after European Central Bank Governing Council member Axel Webel forecast the German economy would not return to growth until the second half of 2010.
This view was echoed by the European Commission, which said Europe's economy will not start recovering until the second half of next year as it slashed its forecasts, although it acknowledged some "positive signals" in recent days.
Investors were also wary ahead of an ECB policy meeting on Thursday, where the central bank is expected to cut rates by 25 basis points to 1 percent, with the market focusing on what additional unconventional steps it might announce.
The dollar fell against riskier currencies such as the Australian and New Zealand dollars as European equities rose 0.6 percent .FTEU3. Both the dollar and the yen typically fall when investors increase exposure to risk.
Data showing signs of improvement in the euro zone, China and India helped bolster sentiment.
Analysts noted, however, that volumes were very thin with London markets closed for a public holiday and Tokyo markets shut until Thursday for the Golden Week holiday, making trading very volatile.
"We had some positive data out of China, which was good for risk sentiment, but liquidity is very thin today," UBS currency strategist Geoffrey Yu said.
"We're at the tail end of a risk rally here and it is questionable how sustainable this is, particularly when we have four central banks meeting this week (the ECB, Bank of England, Reserve Bank of Australia and Norges Bank)," he added.
At 1105 GMT (7:05 a.m. EDT), the euro fell 0.1 percent against the dollar to $1.3247, having earlier traded as high as $1.3346. Against the yen, it rose 0.1 percent to 131.58 yen, off an earlier three-week high of 132.87 yen.
The dollar also rose against the yen, gaining 0.3 percent to 99.32 yen.
Among higher-risk currencies, the Australian dollar was the best performer, gaining 0.3 percent against the U.S. dollar to $0.7324 and dipping against the yen to 72.76 yen. It had earlier hit seven-month highs of $0.7390 and 73.54 yen.
The New Zealand dollar also rose 0.1 percent against the dollar to $0.5714.
Elsewhere, sterling turned lower after failing overnight to breach the $1.50 level, with investors cautious ahead of a Bank of England policy decision on Thursday.
It was down 0.4 percent against the dollar to $1.4853, while the euro gained 0.1 percent to 89.12 pence.
