The euro raced to a near six-week high against the dollar and scaled a fresh five-year peak versus the yen on Monday after strong U.S. payrolls data boosted risk appetite despite threats of a possible reduction in the U.S. monetary stimulus.
The closely watched U.S. payrolls report on Friday showed employers hired more workers than expected in November, driving the jobless rate to a five-year low of 7.0 percent.
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"The financial markets interpreted the data as suggesting there's no need to be pessimistic about the global economy, leading to risk-on trades," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The dollar initially rose on the data, which added to speculation that the Federal Reserve could start scaling back stimulus this month. Tighter U.S. monetary policy means less dollars to go around in markets, and is seen positive for the dollar.
But sharp gains in stocks led currency traders to quickly switch their positions to bet on higher risk appetite, which tends to depress the dollar -- and the yen even more.
The rose to as high as $1.3748 from $1.3701 late in New York on Friday, spurred by a wave of stop-loss buying after $1.3710 was breached in very thin early trade. It later recoiled to $1.3711.
Against the yen, the euro climbed to 141.54, reaching highs not see since October 2008.
"It seems like markets have finally braced themselves for tapering of the Fed's stimulus. Maybe they are getting used to the idea after having done fire drills earlier," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
Global equity markets tumbled in May when Federal Reserve Chairman Ben Bernanke flagged the possibility that the Fed will shrink its bond buying scheme.
A Reuters poll showed Wall Street firms expects the Fed to start reducing its massive bond-buying program no later than March, with a handful of them expecting action as early as next week following a second straight month of robust jobs gains.
A few Fed policymakers will be speaking later in the day, likely attracting attention of traders desperate to know when the tapering will happen.
The euro was further underpinned by a growing view that the European Central Bank (ECB) is in no hurry to provide additional stimulus.
At the Dec. 5 policy meeting, the ECB chose not to follow through on November's surprise cut and said it has yet to come up with a detailed plan of which policy tools to use and when.
"All told, the ECB seems to be slipping back into its old ways, characterized by a reactive and unaggressive approach to monetary policy," analysts at Nomura wrote in a note to clients.
"In relation to the euro, this means that the upward trend in the euro TWI, which has been observed since April could be sustained for a bit longer," they said, referring to the euro's trade weighted index (TWI).
Strength in the euro saw the dollar index stuck near six-week low of 80.223.
Further supporting the Aussie, data on Sunday showed China's exports handily beat forecasts in November, adding to recent evidence of a stabilization in the world's second-largest economy. China's imports of Australian goods hit a record high.
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The Chinese yuan also hit a new post-revaluation high, breaking out of its narrow trading range in a possible sign of more economic confidence in Beijing.
Against the low-yielding yen, the greenback held firm at 102.98 yen following Friday's 1.1 percent rally, not far from six-month peak of 103.38 yen hit on Tuesday.
The yen continues to be the underdog thanks to the Bank of Japan's ultra-loose monetary policy.
Data on Monday showed Japan's current account balance unexpectedly fell into the red in October, underpinning the dollar against the yen.