The euro rose broadly on Monday after the euro zone manufacturing sector showed signs of stabilising, while a slip in equities weakened the dollar against the yen. Both the euro and the yen could, however, trade lower against the dollar in coming months if US data such as this week's non-farm payroll figures give impetus to expectations the US Federal Reserve will scale back its $85-billion-per-month stimulus programme.
The euro rose after Purchasing Managers' Index (PMI) data showed the decline in eurozone manufacturing had eased significantly in May. The euro was up 0.2 percent against the dollar at $1.3016. Resistance was cited at last week's high of $1.3062. A reported option expiry at $1.3000 could keep the currency pinned to that level.
The next focus is Thursday's European Central Bank (ECB) rate decision. Market participants are weighing the possibility of another interest rate cut, either in the benchmark refinancing rate or a move to take the deposit rate negative. Either could drag the euro lower. "We are in the 'no change' camp, but what is going to be key is the rhetoric... clearly there has been a lot of speculation about negative deposit rates and that is really going to be the one to watch," said Christian Lawrence, currency strategist at Rabobank.
Against the yen, the dollar faltered as the Nikkei lost 3.7 percent on Monday, while European shares struggled to hold gains. The dollar was last down 0.2 percent at 100.31 yen, close to a 3-week low. Support was cited at 100 yen and a large option expiry was reported at 101.3 yen.
"Dollar/yen has been held hostage to the broader risk-off environment," said Alvin Tan, currency strategist at Societe Generale. "The market is very short yen and that means that it is vulnerable to further short covering in the yen, meaning a lower dollar/yen ... if risk continues to be under pressure."
Positioning data on Friday showed currency speculators had continued to add bets on further yen weakness, despite its latest move higher. They also increased their bets in favour of the dollar to the highest since at least June 2008. Overall strategists said the Bank of Japan's aggressive easing policy will push the yen lower in coming months. Societe Generale's Tan expects the dollar to close the year at 108 yen. Volatility in the Japanese benchmark stock index has weighed on dollar/yen for the past week and a half, with the Nikkei's 7.3 percent plunge on May 23 toppling the dollar from a 4-1/2 year peak of 103.74 yen hit on the previous day.