SYDNEY: The yen was on the defensive in Asia on Monday with the euro reaching a fresh five-month high against the Japanese currency, while the dollar nursed losses following a setback late last week.
The single currency was at 110.03 yen, having risen as high as 110.09. Immediate resistance is seen around 110.16, the 50 percent retracement of the April-January fall. A break there could open the way to around 111.60, the Oct. 31 peak when Japan intervened heavily to curb the yen's strength.
The Australian dollar, which had already pierced through the 88.00 yen barrier on Friday, last stood at 88.56, bringing into focus the 2011 peaks near 90.00.
The yen's status as the currency of choice in funding carry trades was cemented last month after a surprise easing by the Bank of Japan. Additionally, the recent surge in US Treasury yields has made the greenback less appealing as a funding currency versus the yen.
As a result, currency speculators have increased bets against the yen to their highest in 11 months, data from the Commodity Futures Trading Commission released on Friday showed.
Traders, though, said the yen could see some correction this week if rising oil prices hit risk sentiment. US crude climbed more than 2 percent on Friday due partly to ongoing tensions over Iran's disputed nuclear programme.
"With a recession in the euro zone now widely expected to significantly slow global output as a whole, investors' hopes have turned to the emerging pickup in the US to act as a counterweight," said Ilya Spivak, Currency Strategist at DailyFX.
"If fears that an oil price spike will snuffed out the US recovery again (as happened in late 2010 - early 2011) begin to multiply, souring sentiment will push capital out of risky assets like stocks and into safe havens including Treasury bonds. This will weigh on yields anew, allowing the yen to correct higher."
Indeed, data last Friday showed US consumer prices rose the most in 10 months in February as the cost of gasoline spiked. Thankfully, the report also showed little signs of underlying inflation building.
Still, a pause in the run of upbeat US data on Friday saw the dollar give up most of last week's gains as investors assessed whether the recent surge in US yields reflected a strengthening in the economic recovery.
The improving outlook has led the market to lengthen the odds of more stimulus from the Federal Reserve. But Chicago Fed President Charles Evans said on Friday the central bank should do even more to boost growth, or risk stagnation that could persist for a decade or more.
The dollar index last stood at 79.741, having retreated from a two-month high of 80.738 set on Thursday.
The euro bought $1.3181, well off last week's trough of $1.3002. The Australian dollar was also firmer at $1.0606 , building on last week's recovery from a low of $1.0422.
Given a recent batch of soft data, the market is keenly awaiting a speech by Australia's central bank governor at 0500 GMT for any hint that rates might be cut.
"We do not expect the tone of the Governor's comments to deviate much from those delivered recently in published statements...the central view seems to be that the ongoing tussle between the weakness domestically and the strength in mining will settle somewhere around trend growth," said Stephen Walters at JPMorgan.
"Recent data has been weak, but we suspect it is too early for officials to conclude that the cost of the structural adjustment domestically is outweighing the benefits of the mining boom."
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