The dollar pulled away from a nine-month high against the yen having risen more than 7 percent in about a month. The euro was also lower against the safe-haven yen.
Riskier assets like stocks were hit after Asian powerhouse China lowered its growth target, while euro zone surveys of purchasing managers fell from initial estimates, driving the single currency to a two-week low against the dollar.
The euro fell to $1.3160, before recovering to trade at $1.3195, with large investors looking to sell it into a bounce above $1.3200. Bids for the euro were cited at $1.3150/55 and stops below $1.3130 with many nervous about Greece's bond swap and uncertainty about the level of private participation.
All of which is likely to keep it well below recent peaks of $1.3486.
Bondholders have until March 8 to join an agreement under which they will exchange their existing Greek government bonds for new paper in a swap deal that will see the nominal value of their holdings cut by 53.5 percent.
Failure to secure a deal could threaten the 130 billion euro deal that has been painfully stitched after months of negotiations. The positive impact of the European Central Bank's huge injection of three-year money last week (LTRO) has also waned, giving investors more reasons to go short on the euro.
"The sugar rush from the ECB's LTRO has faded and the PMI surveys underline the structural problems the euro zone faces," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"Italy and Spain are looking down and the macro fundamentals ex-Germany do not look too encouraging. I would look to play euro from the short side against the dollar and the yen."
Not helping the single currency, Spain on Friday set itself a softer budget target for 2012 than originally agreed under the euro zone's austerity drive, putting a question mark over the credibility of the European Union's new fiscal pact.
General elections in Greece and France in the next few months as well as the risk of a recession and prospects of further rate cuts by the European Central Bank are also combining to keep investors wary of the euro.
"Having topped up at around $1.35, the euro is likely to drift lower with the new range likely to be at $1.25-1.30," said Steve Barrow, head of G10 currency research at Standard Bank.
BNP Paribas analysts said hedge funds and real money accounts were switching their allegiances with regards to favoured funding currencies for interest rate carry trades from the US dollar to the euro and to a lesser extent the yen.
That involves borrowing money in those currencies to buy higher yielding and riskier assets.
Since the European Central Bank's second injection of around half a trillion euros of cheap three-year funds last week and a surprise policy easing by the Bank of Japan a few weeks ago, both the euro and the yen have come under pressure.
YEN SELL-OFF ABATES
The sharp yen sell off since mid-January, however, showed signs of taking a breather with the dollar struggling to break above 82 yen and the euro unable to gain above 110 yen.
Latest positioning data from the Commodity Futures Trading Commission showed that the sharp yen sell-off coincided with a reversal in speculative positioning that has flipped to net short positions.
Analysts said with speculators now positioned for a weaker yen, more losses were likely to be small, especially given US interest rates would not rise in a hurry. The dollar/yen pair has a tight relationship with the two-year spreads between the US Treasuries and Japanese government bond yields.
The dollar fell 0.7 percent versus the yen to 81.20 yen , retreating from a high of 81.873 yen on Friday on trading platform EBS. As of Friday, the dollar had risen by about 7.7 percent from a three-month low hit near 76 yen in early February.
On Monday, yen buying by offshore institutional investors also weighed on the dollar, which extended its losses after triggering some stop-loss sell orders at levels below 81.50 yen, traders said. The next major hurdle is seen at the 100-week moving average around 82.10 yen or so.
The euro was down 0.7 percent at 107.17 yen with CIBC's Stretch expecting the common currency to drop to around 106 yen in the near term.
Meanwhile, the growth currencies like the Australian and New Zealand were lower against the dollar. The Aussie was down 0.4 percent at $1.0690 while the kiwi shed 0.8 percent to trade at $0.8220 as global stock markets came under some downward pressure.