The dollar held near last week's one-month lows against major currencies on Monday, as investors consolidated positions after a sell-off in the greenback that had been started by weaker than forecast US growth data.
The yen ticked up against both the dollar and the euro as investors unwound extreme short positions in the Japanese currency ahead of key Bank of Japan events on Tuesday, which could shed light on the chances of a BoJ rate hike this year.
News on Friday the US economy grew just 1.6 percent on an annualised basis in the third quarter - its weakest pace in over three years - prompted investors to step up expectations for US interest rate cuts in early 2007.
Further clues on whether the Federal Reserve will soon need to cut rates from the current 5.25 percent will come at 1330 GMT with the release of personal consumption expenditure data for September - the central bank's favoured inflation measure.
"We had a fairly big sell-off at the end of last week and people are not sure that we've got the momentum to get through (big levels) in the short run so there is a little bit of profit taking," said Adrian Schmidt, currency strategist at RBS Financial Markets.
"We are still looking at a softish dollar tone," he added. By 1231 GMT, the euro was at $1.2729, not far off four-week highs of $1.2750 hit after the GDP data on Friday. Sterling hit a one-month high of $1.9021, supported by robust UK mortgage lending data.
The yen gained around 0.2 percent to 117.34 per dollar and 149.40 per euro as investors unwound their extreme short positions in the currency ahead of BoJ's semi-annual outlook on the economy and prices, rate decision and a news conference from BoJ Governor Toshihiko Fukui on Tuesday.
"The market doesn't expect any rate hike tomorrow but if we get any hint of probable further rate hikes sooner than the market expects.... we may see another spike in the yen," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankurt. "Ahead of this event the market is already closing some short positions on the yen."
Currency speculators built positions against the yen to a record 137,290 contracts in the week to October 24, US Commodity Futures Trading Commission data showed on Friday. Such extreme positioning has made the yen susceptible to a move higher.
US September core PCE - which excludes food and energy - is forecast to rise 0.2 percent on the month, the same pace as in August, which would likely pull the year-on-year pace of growth back down to 2.4 percent from 2.5 percent.
Monday also features speeches by Richmond Fed President Jeffrey Lacker - who has voted for a rate hike at the last three policy meetings against an on-hold consensus - at 1330 GMT and by Chicago Fed President Michael Moskow at 1415 GMT.
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