TOKYO: 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 Aug. 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 Sept. 6 policy meeting, though its implementation is likely to start in late September at the earliest.
While hopes that the ECB will buy short-term Spanish bonds if Spain requests a bailout have bolstered the euro the past several weeks, it remains unclear if this would be enough to restore investor confidence in southern European sovereign debt.
"It seems like it will take some time before the ECB starts buying bonds so there's a chance markets will get disappointed," said a trader at a Japanese bank.
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.
"I have a feeling that there are still some players who are long in the euro/yen after the Fed's minutes and that the market may be forced to trigger more stop-losses on these positions even though I'm not super-bearish on the euro," said a trader at a British bank.
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.
AUSSIE, KIWI HEAD SOUTH
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.
Sharp drops in the price of iron ore, coal and other commodities are adding to worries, although Australian Treasurer Wayne Swan dismissed concerns the declines will weaken government revenues.
"Given that the Aussie's fair value based on purchasing power parity is around $0.70, a level above $1.05 would be difficult to maintain," said Tokyo-Mitsubishi's Uchida.
"On the other hand, the Australian central bank is not as inclined to ease as the Fed and the ECB. There's buying in the Aussie by central banks which want to increase the Aussie in their foreign reserves. So I do not expect it to fall below parity against the dollar," he added.
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.
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