The yen rose broadly Monday as investors grew more risk averse, while the euro eked out a small gain against the dollar as the market weighed inflation remarks from monetary policy-makers.
The euro, coming off its worst week against the dollar in 1-1/2 years, had edged up overnight after European Central Bank governing council member Axel Weber told a German newspaper the central bank had not relaxed its view on inflation.
But it pared most of those gains in New York trade as fears of more credit fallout reinforced views that the ECB will have to cut interest rates this year.
"The euro is not going to break out of the range it has held against the dollar since November until the second leg of the assumption, that the ECB will actually reduce rates, comes closer to reality," Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, N.J. said in a client note.
Late afternoon in New York, the euro was trading at $1.4523, up 0.1 percent but off the overnight high of $1.4577, according to Reuters data.
The euro struggled last week after the ECB left interest rates at 4 percent and focused its policy statement on growth risks, cutting wording about pre-emptive action on inflation.
Weber and ECB President Jean-Claude Trichet have since tried to refocus markets on euro-zone inflation, which recently hit a 14-year high.
Analysts said the market was interpreting it all to mean the bank is moving into a neutral policy stance, a prelude to an eventual rate cut.
"They're playing the equivalent of 'good cop, bad cop,' saying they're worried about weak growth but then sending out a credible figure like Weber to remind markets not to expect rate cuts this quarter," said CMC Markets analyst Ashraf Laidi, who said he sees the bank cutting by mid-year.
Market unease helped the Japanese currency rise against the dollar and euro as traders unwound risky trades financed with cheaply borrowed yen. Against the yen, the dollar fell 0.4 percent to 106.91 yen and the euro was down 0.3 percent at 155.27 yen.
The weekend Group of Seven industrialized nations meeting in Tokyo offered little news for foreign exchange markets.
Finance leaders' focus on the crumbling U.S. housing market and its impact on world economic conditions and bank lending added to risk aversion on the margins, helping the yen.
The language on currencies was largely a repeat of the previous statement, with the G7 saying exchange rates should reflect economic fundamentals. They tweaked comments on China's yuan to say "we encourage" the need for greater appreciation of the currency, instead of "we stress."
The Australian dollar was among the best performing major currencies, rising 1 percent against the U.S. dollar to $0.9041 after the central bank warned it would likely need to raise interest rates again to counter inflation.
The Reserve Bank of Australia hiked rates to an 11-year peak of 7 percent last week, and markets now expect another hike in March.
But strategists said it may be tough for the Aussie dollar to hold its gains in the current risk-averse environment.
"While we recognize that the RBA hiking rates will increase the yield advantage of the Australian dollar, it is the willingness of investors to buy this yield that remains the main driving factor for the currency," strategists at Barclay's Capital wrote in a note to clients. "We therefore continue to expect a weaker Australian dollar going forward, as we continue to expect weak equity markets ahead."