The dollar clawed back some of the ground it had lost against the yen on Monday, after skidding on mixed U.S. employment data that failed to bring much clarity to the timing of the U.S. Federal Reserve's long-awaited interest rate hike.
The dollar added about 0.3 percent against the yen to 119.38, moving away from a session low of 118.66 and taking back some of Friday's 1 percent tumble, though many investors said the greenback's downside remains vulnerable.
"It comes down to positioning," said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo.
Data from the Commodity Futures Trading Commission released on Friday and Reuters calculations showed that speculators further cut back bullish bets on the U.S. dollar in the week ended Sept. 1 for the second straight week, to their lowest level since July last year.
"It's been a very yen-weakening, dollar-bull-run story for three years now, so you would have to think that there were significant yen-short positions built up over that time and there's a lot of room for a correction in that particular position," Wakabayashi said.
The options market also shows that more investors are betting on or hedging against further near-term yen strength.
In early August, one-month risk reversal spreads in dollar/yen options had favored yen puts - the right to sell the yen. But they turned in favor of yen calls - the right to buy the yen - and on Friday gapped to their widest in two years, as the dollar sank after the U.S. employment data.
Nonfarm payrolls rose a less-than-expected 173,000 last month, a slowdown from July's upwardly revised gain of 245,000 and the smallest rise in five months. But the unemployment rate dropped to a near 7-1/2-year low and wages accelerated.
"The problem is that these numbers are probably consistent with 2 to 2.5 percent GDP growth at best, good enough to begin the normalization of U.S. rates but not good enough to serve as a locomotive for the rest of the world," Steven Englander, global head of foreign exchange strategy at Citi, said in a note to clients.
The figures came against a backdrop of anxiety about falling global equities and China's slowing economy, which have led investors to pare back bets that the Fed would raise interest rates as early as its meeting this month.
The dollar skidded to a seven-month low of 116.15 yen on Aug. 24, while the euro rose as high as $1.1715, as China-driven panic gripped markets around the world.
On Monday, the euro gained about 0.1 percent to $1.1146. The European common currency has benefited as investors unwound euro-funded carry trades, in which they borrowed euros to invest in high-yielding currencies.
The European Central Bank warned last week that growth would suffer from fading momentum in emerging markets, particularly China, and falling oil prices could drag the 19-member euro zone back into deflation in coming months.
After the ECB left rates unchanged as widely expected, ECB President Mario Draghi explicitly said for the first time that the bank's bond-buying programme may run beyond its end-date of September 2016, and that its size and composition might be adjusted.
The dollar index, which measures the greenback against a basket of rival currencies, edged up about 0.1 percent from Friday's late U.S. levels to 96.284, well above a seven-month low of 92.621 plumbed in August.
Trading activity was likely to be thinner than usual on Monday, with U.S. markets closed for the Labor Day holiday.