The dollar slipped to a new four-week low against the euro on Monday on renewed concerns about a possible slowdown in the US economy after the US trade gap widened and as oil prices struck fresh record highs.
Traders said that buying interest in the euro, which also hovered near a three-month peak versus the yen, was a result of investors seeking an alternative to the dollar and the yen after recent weak data from both the United States and Japan.
With no fresh news likely to bump the dollar or the yen out of current ranges in the near-term, the euro could test its upside against those currencies, they said.
"As long as the market is worried about rising oil prices and recent weak economic data, investors will likely stay away from the dollar or the yen, leaving them no choice but to buy the euro," said Hideaki Furumaya, a forex manager at Trust and Custody Services Bank.
NYMEX crude oil futures hit a record high of $46.90 a barrel on Monday on concerns about possible disruption to oil supply.
The euro was at $1.2373/77 after touching a fresh four-week high of around 1.2380 in early trade. It fetched around 1.2374 in late US trading on Friday.
It fetched 136.67/68 yen slightly below a three-month peak of 136.99 hit on Friday.
Traders said that options-related selling kept the European currency from climbing above 137 yen.
The dollar was slightly weaker against the Japanese currency at 110.61/65 yen versus 110.68/73.
Furumaya said the dollar seemed capped at 112 yen, while euro support looked firm at mid-135 yen and just below $1.23.
"With the dollar/yen caught in ranges, money seems to flow to the euro whenever there is weak US data such as jobs," said Mitsuru Yaguchi, senior economist at Mitsubishi Securities.
"It's not a flight-to-quality type of outflow of funds from the dollar, but simply the euro being chosen as an alternative to a weak US dollar," he said.
The US Commerce Department said on Friday that the trade deficit widened to a record $55.8 billion in June, defying expectations for a slight widening to $47.0 billion, as exports dropped and imports rose.
Still, steep dollar-selling against the yen was seen as unlikely despite that data as players were also reluctant to chase up the Japanese unit after surprisingly weak Japan growth figures for the April-June quarter, also released on Friday.
"We had negative figures for both the yen and the dollar so it's hard to think the market will move in just one direction," said Toshiaki Kimura, chief manager of the forex division at Mitsubishi Trust and Banking.
"There is a possibility that the dollar could fall back into the 109 yen-level but I think the core range will still be 110-112 yen."
Traders said that US capital flows data for June, due at 1300 GMT, will be closely watched, especially in the wake of the trade balance numbers.
A drop off in capital going into the United States could deal a further blow to the dollar, traders said.
In May, foreign investors sharply slowed the pace of their investment in the United States. Net capital inflows totalled $56.4 billion, down from $76.0 billion in April.