TOKYO: The euro recovered a tad on Monday on Asian buying after lunar new year holidays, though it remained on shaky ground after a jump in U.S. Treasury yields undermined its yield advantage.
With many market players still seen caught in euro long positions, the euro risks extending a retreat from last week's 12-week high that started after the head of the European Central Bank sounded less concerned about inflation than many expected.
A rise in January U.S. payrolls shown in data released on Friday was much smaller than expected, but traders concluded the figure was affected by severe snow storms and instead focused on a sharp drop in the jobless rate.
The unemployment rate fell to 9.0 percent in January, compared to 9.8 percent in November, marking its biggest two-month decline since 1958.
While the report is unlikely to prevent the Federal Reserve from completing its $600 billion government bond-buying programme to support the economy, signs of underlying strength in the labour market boosted U.S. bond yields.
"I know some people think the jobless rate is unreliable. But it is one parameter the Fed will be looking at closely," said a trader at a Japanese bank.
The euro rose to $1.3610 , up 0.2 percent from U.S. levels late on Friday, when it fell as low as $1.3543, its lowest in nearly two weeks.
Some Asian accounts were buying the euro after the lunar new year holidays. Mainland China is still on holiday but most other Asian markets resumed trading on Monday.
Asian players were also buying the the British pound and the Swiss franc. The pound rose 0.1 percent to $1.6130 while the dollar fell 0.15 percent against franc to 0.9535.
Many traders think the euro is likely to lose steam once follow-up buying has run its course as a jump in U.S. yields narrowed the euro's yield advantage over the dollar.
German two-year notes now yield 66 basis points over U.S. notes , down from a two-year high of 82 basis points late last month.
In addition, reports of infighting over a French and German push for a comprehensive package of reforms to address the euro zone debt crisis also kept a lid on the euro.
The apparent rift was a stark reminder of the difficulty of getting an agreement in the 17-nation currency bloc, even though traders have grown optimistic in the past few weeks that euro zone policy-makers will hammer out more steps to counter the debt crisis by March.
"The U.S. has seen a run of solid economic data. On the other hand, Europe has many things to decide by March. I wouldn't be surprised if the euro falls to around $1.32 by the end of this month," said Takako Masai, manager of the capital markets division at Shinsei Bank.
The euro's fall came after currency speculators raised their bets on it for the week to Feb. 1 to the most since late October, meaning it could fall if the market unwinds more of the bets.
DailyFX strategist David Rodriguez said short-term momentum may have turned in the dollar's favour.
"Of note, the euro/U.S. dollar set a potentially significant 'Evening Star' reversal formation as it failed to hold fresh multi-month highs on two consecutive trading days and closed sharply lower on the third," he said in a note to clients, referring to the euro's peaking last week.
The Evening Star is considered a bearish reversal signal, as it hints at a rapid waning in buying momentum.
Teppei Ino, an analyst at Bank of Tokyo-Mitsubishi UFJ, said the euro appears to have formed the Evening Star pattern but it may be premature to conclude it is in for more falls unless support around $1.3535 is clearly broken.
That would represent its 90-day moving average, as well as its resistance area last month. Below that, another support point is seen at $1.3483, a 38.2 percent retracement of its Jan. 10-Feb. 2 rally.
"U.S. bond yields rose after the U.S. jobs data and that drove currency markets. But we'll have to see what the Fed makes of it as at the end of the day it's their decision to set rates," he said.
In the coming days, various Fed officials will be speaking, including three regional Fed chiefs on Tuesday and Chairman Ben Bernenke on Wednesday.
The dollar index, which tracks the greenback against a basket of major currencies, was down 0.2 percent at 77.878 but well off a three-month low of 76.881 plumbed on Wednesday.
The dollar was little changed against the yen at 82.20 yen, after having risen more than 1 yen from one-month low of 81.10 yen hit seconds after the U.S. payroll data on Friday.
So far it has shown little sign of breaking out of its recent trading band around 82 yen, stalling ahead of a cluster of resistance points around 82.50 yen, including its 90-day moving average and Ichimoku cloud.
Although some traders think rising U.S. yields could help lift the dollar, many say the pair seems lacking momentum to clear the resistance zone.
The Australian dollar showed resilience, dipping only briefly after surprisingly subdued Australian retail sales data.
The currency stood at $1.0145 , up slightly from late U.S levels but not far from one-month high of $1.0201 hit last Friday.
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