The dollar slipped to a two-month low against the euro on Monday after strong data for US jobs did not convince investors that the Federal Reserve will raise interest rates more aggressively than generally thought.
The US economy added 248,000 new non-farm jobs in May according to figures released on Friday, above the median estimate of 216,000 in a Reuters survey. April's number was also revised upward to 346,000 from 288,000, surprising the market.
The data backed the market's view that the US central bank will raise benchmark interest rates by 0.25 percentage point from a 46-year low of 1 percent at a policy meeting on June 29-30.
But it was not enough to fuel expectations that the Fed could raise rates by a larger 0.50 percentage point in June or that the Fed would continue to raise rates later this year, inducing profit-taking.
"It has become clear that the Fed will raise rates later this month," said Kota Kimura, assistant forex manager at Shinkin Central Bank.
"But we still don't know the pace of the Fed's tightening after that. It's even harder to know how money will flow. So I don't think a clear trend will emerge."
The euro briefly rose to $1.2337, its highest level in two months and about 0.4 percent above what it was fetching in late New York trade on Friday. It had retreated to $1.2325 as of 0557 GMT.
The dollar was around 110.15 yen, down nearly one yen from late US levels.
The Japanese currency was also supported by a strong gain in Tokyo's Nikkei share average, which ended trade up 2.8 percent.
Traders are looking to this week's data on US producer prices and consumer sentiment to see whether they might bolster the case for faster US rate rises than currently expected.
"The market has priced in a rate hike of 25 basis points. Now the market is looking to price in data," said Toshihiro Azuma, forex manager at Sumitomo Trust and Banking Corp.
Figures for May producer prices are expected to show a 0.6 percent gain, while the University of Michigan's consumer sentiment survey is seen steady at 90.2 in June. Both are due on Friday.
Investors also will scrutinise comments from Federal Reserve Chairman Alan Greenspan, who speaks on Tuesday and Thursday.
Elsewhere, sterling also posted strong gains against the dollar, rising as high as $1.8472 before easing to around $1.8465 compared with $1.8375 in late US trade.
The Bank of England is expected to raise its benchmark interest rate on Thursday from 4.25 percent, a prospect that should keep the pound well supported until then, analysts say.
The market is also waiting on rate-setting decisions from the Bank of Canada and Reserve Bank of New Zealand, both due later in the week.
Data from Japan's Finance Ministry on Monday showed that foreign reserves rose to $816.848 billion in May, up from $814.969 billion in April.
The ministry said late last month that the government had not conducted foreign exchange intervention in May.
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