The euro sagged against the dollar while the yen gained broadly as market players trimmed their long positions in risk currencies ahead of a central bankers' meeting later in the week. The Australian dollar hit a one-month low against the dollar and the yen as it also smarted from worries about the extent of the slowdown in China, and the impact on the mining boom in Australia.
Analysts say the euro's recovery, triggered after ECB chief Mario Draghi said he would do whatever it took to save the euro, might be losing momentum as the currency slipped further from a seven-week peak hit last week. "The euro had been bought on hopes after the ECB comments. But unless the market sees action to back up its words soon, the rally will fizzle," said Minori Uchida, chief FX strategist at the Bank of Tokyo-Mitsubishi UFJ.
The euro fell as low as $1.2465 before paring most losses to trade at $1.2492, still down about a full cent from its seven-week high of $1.2590 on August 23. Since last week, the euro had also been supported by minutes of the US Federal Reserve's last policy meeting, which sparked expectations it may start a fresh round of stimulus next month. But many traders are now looking for more solid signs of that, awaiting Friday's speech by Fed Chairman Ben Bernanke at an annual informal meeting of central bankers at Jackson Hole, Wyoming.
On the other hand, the ECB is expected to reveal further details of a new programme to lower the debt yields of Spain and Italy after its September 6 policy meeting, though its implementation is likely to start in late September at the earliest. Against the yen, the euro fell 0.3 percent to 98.10, having slipped to 97.88 yen at one stage as some market players were forced to cut losses on the pair, while Japanese investors were also said to be selling the euro against the yen.
The yen was also helped by Japanese exporters' buying against the dollar as well as loss-cut buying in other cross/yen pairs. The US dollar fell 0.3 percent to 78.52 yen. But in a sign of strong expectations of range-bound trade, implied volatilities on dollar/yen options remained around 6.5 percent, one of the lowest levels in recent years. The Australian dollar hit a fresh five-week low of $1.0345, pressured by worries over the slowdown in China's economy as Shanghai shares hit fresh 3 1/2-year lows on Monday.
The Aussie also hit a one-month low of 81.22 yen, and a seven-week low of A$1.2069 per euro. Some traders said the Aussie's slide was triggered by an abrupt fall in the New Zealand dollar, which fell more than 0.3 percent at one point to $0.8057 after the dairy processor Fonterra Co-operative Group - the country's largest company - cut its forecast payout to farmers because of a high kiwi.