The dollar rose against the yen Monday, trading near a 3 1/2-year high set the previous session when strong U.S. jobs data spurred speculation the Federal Reserve could back away from its ultra-loose monetary policy sooner than expected.
But the greenback edged lower against the euro as investors booked profits after it hit a three-month high on Friday off the U.S. government report showing surprisingly strong job gains in February and a four-year low in the unemployment rate.
With the state of the U.S. labor market key to Fed policy, the report fueled speculation that the Fed could rein in its stimulus measures.
Some strategists, however, said the market reaction to the jobs data might have been overdone, with some contending the report will not be enough to trigger the Fed's reconsideration of its third round of quantitative easing, or QE3.
"Instead, the February report will likely be perceived by the Federal Reserve as another step in the right direction, but not great enough to warrant a reconsideration of the current pace of QE3," said Christopher Vecchio, currency analyst at DailyFX in New York.
"For now, the Fed will continue its $85 billion a month in asset purchases as planned," he said.
The Fed's bond-buying program is a negative for the dollar as it is tantamount to printing money and dilutes the currency's value. Should the Fed sustain its program but lower the amount of asset purchases it makes each month, that would buoy the dollar.
The dollar index, which tracks the greenback against a basket of major currencies, was last down 0.1 percent at 82.618, below a seven-month high of 82.924 hit on Friday.
The Fed, at its last policy meeting in late January, left in place its $85 billion bond-buying stimulus program and repeated a pledge to keep purchasing securities until the outlook for employment "improves substantially."
Against the yen, the dollar was last trading up 0.3 percent at 96.34 yen, not far from Friday's peak of 96.54 yen, which was its highest level since Aug. 12, 2009.
The euro was up 0.2 percent against the dollar, at $1.3034, above a three-month low of $1.2955 on Friday. Traders said buyers could emerge on dips around $1.2950, which could act as near-term support.
Data released Friday showed speculators boosted their bets in favor of the U.S. dollar in the latest week to the highest in more than seven months.
Economic data out of China, the world's second-largest economy, kept investors cautious but failed to rattle demand for riskier assets, with U.S. stock indices trading higher.
China reported over the weekend that annual industrial production for January and February combined rose 9.9 percent — the lowest level since October 2012 — while its consumer price index jumped more than expected last month.
The dollar's direction has been strongly aligned with equities recently, a trend that has the greenback trading like a growth currency more than a safe-haven asset.
Wall Street stocks edged up on Monday, approaching a 5 1/2-year high, on optimism about the U.S. economy and easy monetary policy from the Federal Reserve.
Central Bank Policies Eyed
While the Fed's next policy step could be to scale back its stimulus, the world's other major central banks could ease policy further.
"It is hard to glean anything too conclusive from the numbers, and Friday's (dollar) move looks like a slight overreaction," analysts at Lloyds said in a note.
"So while we would not be aggressive dollar sellers, we would look for a correction to dollar strength from here, and 83 on the dollar index is likely to prove difficult to break."
The Bank of Japan is perceived to be seeking a "new dimension" of easing under its new governor, Haruhiko Kuroda, who is expected to be appointed this month.
Meanwhile, analysts said the euro is also likely to trend lower against the dollar because of growing worries about peripheral countries of the euro zone and political concerns about Italy.
Ratings agency Fitch added to Italy's mounting problems on Friday by cutting its credit rating due to the political uncertainty, deep recession and rising debt.
The Italian downgrade also sent tremors through Europe's sovereign bond market, with investors worried about its effect on a bond sale for up to 7.25 billion euros ($9.4 billion) of new debt on Wednesday.
The yield gap between 10-year Italian and safer German bonds widened and the cost of insuring Italy's debt against default also rose.