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Yen steadies off 2 1/2-year low, but seen fragile
Sentiment toward the yen remained bearish, however, as the Bank of Japan was expected to remain under the most pressure among major central banks to ease policy aggressively.
"Now that Japanese policymakers set a two-percent inflation target, they can't stop monetary easing even if the yen falls to around 100 yen per dollar because inflation will be nowhere near two percent in the near future," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
The dollar bought 92.63 yen, down 0.2 percent from late U.S. trade on Friday. But it was still not far from a 2-1/2 year high of 92.97 yen seen on Friday.
An attempt early on Monday to test 93 yen was hampered by dollar selling to hedge option barriers. Still, many traders see it on track to retest 95.00, a level at which it was capped in 2010.
"Traders have learned over the past three months that selling the yen is the best way to make money. They will not change that habit unless there's clear change in trend," said a trader at a Japanese bank.
The euro also extended its rally to 126.97 on Friday, nearing its 2010 peak of 127.46. It was last at 126.19 yen, 0.3 percent below late U.S. trade.
Only five weeks into the year and the common currency is already up around 10 percent against the yen. The dollar is nearly 7 percent higher, following a rise of about 13 percent for 2012.
"The Japanese authorities have committed themselves to a 2 percent inflation target, but the market perceptions about economic growth and inflation expectations remain subdued," analysts at Barclays Capital wrote in a note.
"We therefore believe that the authorities will continue to use the JPY as a tool to boost actual inflation, thus helping to validate the new 2 percent target."
Data last Friday showed currency speculators added bearish bets on the yen, while trimming bets against the greenback.
Among the G3 currencies, the euro has been the standout performer, having notched up gains of 3.5 percent against the dollar since the start of the year.
It was last at $1.3627 down slightly from late U.S. levels after climbing as high as $1.3710 on Friday, a level unseen since late 2011.
Data last Friday showing euro zone factories had their best month in nearly a year during January underscored optimism for the euro.
U.S. jobs data was mixed with employment growing modestly in January but encouragingly, job gains in the previous two months were larger than first reported.
Part of the reason for the euro's outperformance is the European Central Bank's relatively upbeat view on the euro zone economy.
The currency has been so far unfazed by a corruption scandal in Spanish ruling party, which drove public support for Prime Minister Mariano Rajoy to a record low.
The Bank of England is expected to maintain a dovish tone when it meets on Thursday. This will give no reprieve to sterling, which has slumped to 15-month lows on the euro. The common currency bought 86.91 pence, having risen as high as 87.16 pence.
Against the dollar, sterling was trading at $1.5698, dangling just above a five-month low of $1.5674 hit a week ago.
Commodity currencies have somewhat faded into the background, although the New Zealand dollar has been quietly grinding higher thanks to the hawkish tone struck by the Reserve Bank of New Zealand in recent comments.
The kiwi drifted up to a 16-month high against the greenback at $0.8493 and hit a 2-1/2 year peak to the Australian dollar, which slid to NZ$1.2274.
The Aussie is set to remain on the defensive as the Reserve Bank of Australia (RBA) is expected to keep the door open to more rate cuts this week.
While the RBA is not expected to ease at its first meeting of the year on Tuesday, analysts expect it will eventually be forced to do so later in the year, given the number of economic sectors struggling with the strong currency.