The dollar recovered by nearly one percent from last week's six-week low versus the yen on Monday as dealers lost enthusiasm about betting on a near-term revaluation of China's currency. The yen was also hurt by reports that North Korea may have test-fired a missile into the Sea of Japan. The currency retreated further from a three-month peak versus the euro set on Friday after a Chinese state newspaper said deepening reforms had created the conditions for China to revalue the yuan.
That report, coupled with a surprise rise in the yuan's value beyond its tightly regulated trading band on Friday that was later called an error, added to already intense speculation that China will soon relax the yuan's peg.
"We saw a big move last week on the back of these rumours about the yuan, and that has run its course," said Michael Klawitter, currency strategist at WestLB in Duesseldorf, Germany.
"Dollar/yen has retraced a bit, but the argument remains in the market and the dollar's upside is limited."
European trade was stifled by a holiday in Britain. China and Singapore were also closed for holidays on Monday, and Japan will be closed from Tuesday to Thursday for Golden Week holidays.
The yen fell during Asian trade and was down more than half a percent from Friday's US close at 105.38 yen per dollar at 1135 GMT. The yen was also down more than half a percent against the euro at 135.56.
Buying the yen is a popular bet on a near-term move by China to loosen its tight 8.28 peg to the dollar, which is expected to spark a broad rally in Asian currencies.
The dollar was trading virtually steady on the day at $1.2863, after extending Friday's gains to hit a two-week high of $1.2841.
The US ISM manufacturing index for April is due at 1400 GMT, forecast at 55.0 versus 55.2 in March, well above the 50 level that denotes expansion.
The US Federal Reserve is widely expected to raise interest rates by a quarter point to 3 percent when it meets on Tuesday. The euro recovered slightly from earlier eight-month lows against sterling.
The euro has been under pressure from worries the French may vote against the proposed EU constitution in a referendum on May 29.
French supporters of the constitution have edged ahead of those who plan to vote "no" for the first time since mid-March, an opinion poll released on Saturday said.
The euro was little moved by news that euro zone manufacturing contracted for the first time in 20 months in April as softer global growth and a strong euro hurt exports.
In other markets, Malta, Cyprus and Latvia joined the Exchange Rate Mechanism (ERM-2) over the weekend, following their entry into the European Union a year ago.
On Monday, the European Central Bank set the intervention bands for the ERM-2 newcomers.
The Cyprus pound can trade in a band of 0.673065-0.497483 to the euro.
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