The dollar fell on Monday, with a broadly stronger Japanese yen spilling over into other currencies and prompting dealers to sell the greenback across the board to lock in profits from last week's steep gains. With no major US economic data on Monday, the steady flow of foreign capital into Japanese stocks was giving the market direction.
The euro dropped to a six-week low against the yen earlier in the global session at 133.52 yen, before moving back up to 134.08 yen in late New York trading. The dollar fell 0.7 percent against the yen to 109.68 yen as foreign funds piled into Tokyo stocks amid optimism about Japan's economy.
"The yen continues to piggyback the Japanese stock market," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
"Today we saw the Nikkei (index) hit a four-year high, so the yen continues to benefit from a brightening outlook for the Japanese economy," he added.
Meanwhile, the dollar's softness against the yen helped push the euro back up toward an important technical area of $1.2250-60, analysts said.
In late afternoon trading in New York, the euro rose 0.6 percent against the dollar to $1.2227. The dollar slid 0.4 percent against the Swiss franc to 1.2701 francs, while sterling rose 0.3 percent to $1.8005.
Analysts also said growing public support for Prime Minister Junichiro Koizumi and his reform plans ahead of the September 11 snap election have also helped the currency. A weekend poll in the Yomiuri newspaper showed the popularity of the Koizumi Cabinet had risen 5.5 percentage points to 53.2 percent since early August.
"The rise in the polls is showing that the electorate generally understand what's at stake and are supporting Koizumi's efforts," said Andrew Busch, global foreign exchange strategist at Harris Nesbitt in Chicago.
"The markets are correctly interpreting the situation in the same manner ... It could finally be the catalyst that takes Japan out of its decade plus economic funk," he added.
There appears to be no major flashpoint on the horizon for currency traders this week, barring a speech on Friday by Federal Reserve Chairman Alan Greenspan.
With most currency pairs still within broad summer ranges and positions thought to be relatively neutral, the ebb and flow of technical trading is likely to drive prices this week more than fresh fundamental news.
"Trading is pretty thin: it's pretty quiet and there's nothing very concrete to bite into," said Steven Englander, chief currency strategist for North America at Barclays Capital in New York.
The latest International Monetary Market positioning data show that speculators' net dollar positions on the Chicago futures market have been slashed to largely flat levels. Underlying demand for euros from central banks is likely to keep the euro supported on dips toward $1.20, while interest rate differentials and yield spreads in favour of the dollar are likely to prevent the euro from scaling the $1.2500 level, analysts say.
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