The dollar fell against the yen on Monday on profit-taking after its swift rise to a 2-1/2 year high last week but rose against the euro on speculation the European Central Bank could hint at future rate cuts.
The dollar was down 0.3 percent at 87.87 yen, off Friday's peak of 88.48 yen on trading platform EBS, which was its strongest since July 2010. Traders said the dollar could extend falls if it broke below reported stop loss sell orders at 87.50 yen.
Expectations of aggressive monetary easing by the Bank of Japan has seen the dollar rally more than 8 percent versus the yen since early December. But analysts said investors returning after the holidays with fresh allocations to make this year were taking profit on its rapid ascent.
Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets said there was a risk the BOJ's actions might fall short of market forecasts, leading the dollar to weaken.
"There is a risk that markets got a little bit carried away and that we don't see as much as we were hoping for (from the BOJ) and we see a pullback in dollar/yen."
The BOJ meets on Jan. 21-22. Traders also said the yen found some support on worries that Japanese mobile operator Softbank Corp's deal to buy 70 percent of US carrier Sprint Nextel Corp could run into complications.
EURO FALLS
The euro fell 0.6 percent to 114.57 yen, moving away from Wednesday's 18-month high of 115.995 yen. It also eased 0.3 percent versus the dollar to $1.3038, just above last week's three-week low of $1.2998.
Analysts said the euro was likely to remain under pressure as markets refocus on the euro zone's debt crisis and before the ECB meeting later this week. Any indication of monetary stimulus or comments on economic weakness could push it lower.
"If the ECB doesn't cut rates we could see a minor uptick in the euro," said John Hardy, FX strategist at Saxo Bank. "The bigger risk ... however is if they hint at the possibility of more easing, which will weigh on the euro."
Strategists said the euro had chart support around $1.2987, its 55-day moving average, while traders said a reportedly large options expiry at $1.30 later on Monday could keep the euro trading close to that level.
Late last week, the dollar gained broadly after Federal Reserve minutes showing some policymakers considered ending their bond-buying stimulus as early as this year. Further comments from two top Fed officials suggested on Friday the central bank could halt its asset purchases this year.
Currency speculators became net buyers of the euro for the first time since August 2011 in the week to Dec. 31, according to data from the Commodity Futures Trading Commission released on Friday.
Some analysts said the data suggested the euro had limited scope for further short-covering rallies as investors cut previous bets on the euro falling.
"We have seen a peak in the euro's strength. There was perhaps excessive confidence in the euro as systemic risks in the euro zone remain," Saxo's Hardy said.
Markets will also look at Spanish and Italian bond auctions towards the end of the week. Healthy demand could help the euro gain against the dollar.
