The dollar hit a 2-1/2-week low against the yen on Monday after data showing surprisingly slow US growth in the second quarter further dampened expectations that the Federal Reserve would boost interest rates next week.
The dollar tumbled across the board late last week after data showed US gross domestic product grew at a 2.5 percent annual pace in April-June, below the forecast for 3.0 percent and slowing from 5.6 percent in the first quarter.
"It is difficult to buy the dollar, with the probability of the Fed raising interest rates falling," said a dealer at a foreign bank.
Expectations the European Central Bank will bump up rates this week, and a slight chance the Bank of England could also raise rates, highlighted the possibility that the dollar's yield advantage could soon narrow, said a dealer at a big Japanese bank.
The yen, in the meantime, could rise versus the dollar on lingering speculation that China would allow faster appreciation of the yuan as authorities try to cool the economy's red-hot pace of growth. The yuan rose to 7.9690 against the dollar on Monday, the highest level since Beijing revalued its currency in July 2005.
Speculators on the International Monetary Market had boosted bets against the yen to record levels in the week ended July 25, but traders said the currency may be finding support from some unwinding of such yen short positions.
The dollar was down 0.3 percent at 114.30 yen, its lowest since July 12.
The euro was little changed at $1.2755. Against the yen, the single currency eased to 145.85 yen from around 146.30 yen in late US trade on Friday.
With dollar sentiment turning more bearish, traders said the next key level against the Japanese currency is a low of 113.45 yen hit in early July on surprisingly weak US jobs data. At the same time, the dollar could find support around 114.00 yen - halfway between the year's high around Y119.40 and the year's low just under 109 yen, traders said.
Fading chances that the Fed will raise rates for the 18th consecutive time to 5.5 percent from 5.25 percent when it meets on August 8 has boosted the allure of the euro. To ward off inflation risks, the ECB is poised to boost the key overnight rate to 3.0 percent from 2.75 percent at its meeting on Thursday.
But economists also still see some risk of the Fed raising rates later in the year, especially with inflation pressures still running slightly above the central bank's comfort zone.
"Even if the Fed refrains from raising rates in August, it's not clear what the Fed will do after that," said Kikuko Takeda, currency analyst at Bank of Tokyo-Mitsubishi UFJ. "What we are going to see is a pause, not an end, for rate hikes. And I don't think that will significantly alter capital flows." For further clues about the US rate outlook, market players will scour comments from San Francisco Fed President Janet Yellen who is due to speak on the economy.
Also on tap this week is a bevy of US growth and inflation data, including July readings for the Chicago purchasing management index, ISM manufacturing survey and nonfarm payrolls, as well as the June reading for the core PCE. The Chicago PMI of manufacturing activity, is expected to show a drop to 56.0 in July from 56.5 a month earlier.
The yen's reaction was muted to a stronger-than-expected 1.9 percent increase in Japan's industrial output in June, underscoring the economy's solid expansion and resilience to slowing US growth.