The dollar was on the defensive against major currencies on Monday, as disappointing U.S. jobs data on Friday highlighted a weakening U.S. economic outlook.

Market players were wary of chasing prices aggressively ahead of the U.S. Federal Reserve's policy meeting on Tuesday, with expectations mounting for some form of additional monetary easing.

The U.S. employment report was disappointing, and leaves a close call whether the Fed will take more steps tomorrow, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Traders also kept a close eye on the yen, which rose to 85.02 yen versus the dollar on trading platform EBS on Friday, just shy of a 15-year peak of 84.82 yen hit last November.

By 3:35 a.m. ET, the dollar rose 0.2 percent to 85.67 yen. Hefty buy orders were seen in the 84.90-85.00 yen area.

Stop losses were cited just under option barriers at 85.00 yen, traders said. More stops were sitting below 84.82 yen.

Option barriers at 84.75 yen were seen expiring later in the week, traders said.

Activity was subdued in Asian trade as financial markets in Singapore were shut for a national holiday, while many Japanese investors are away for the summer Obon holidays this week.

Data from the U.S. Commodity Futures Trading Commission on Friday showed currency speculators increased their net yen long positions to the highest level since December.

The market is long yen now which eases some downside pressure on yen crosses. Positions are quite stretched, BTM-UFJ's Hardman said.

Data on Friday showed that overall U.S. non-farm payrolls fell 131,000 in July, while private employment, a better gauge of labor market health, rose a modest 71,000, below forecasts for a gain of 90,000.

CENTRAL BANKS EYED

The euro was steady on the day at $1.3289, staying within sight of a three-month peak of $1.3334 struck on Friday.

The dollar's general weakness could keep the euro buoyant in the near term, but profit taking on a rally in euro/dollar is expected to increase as the euro approaches the psychologically key 1.3500 level.

That level almost coincides with a 50 percent retracement of the single European currency's fall from a November peak of $1.5145 to a four-year trough of $1.1876 hit in June.

The dollar index was little moved at 80.377 .DXY. Support was seen at the April low of 80.031 and March trough of 79.507, analysts said.

The market has been factoring in expectations the Federal Market Open Committee will decide to use cash from its maturing mortgage bond holdings to buy new mortgage or Treasury bonds, although the amount itself would not be large.

Most players now expect the Fed to discuss additional steps to relax its monetary policy tomorrow. In fact, it's so priced into the market that share prices could fall if the Fed doesn't do it, a trader at a European bank said.

The Bank of Japan also kicked off a two-day policy meeting. As long as the yen's climb is gradual, it is likely to keep policy steady when it concludes its meeting on Tuesday, analysts said.

(Additional reporting by Rika Otsuka in Tokyo; Editing by Susan Fenton)

Jobs