The dollar retained most of its gains against a basket of currencies on Monday but lost ground to the yen as Japanese exporters and short-term speculators took advantage of its jump the previous session on U.S. jobs data.

The dollar rose 2 percent against the yen on Friday and gained more than 1 percent against the basket .DXY after the July U.S. jobs report gave the clearest indication yet that the economy is turning around from a deep recession [ID:nN07385157].

For much of the past few months, the dollar has tended to fall after upbeat numbers on the economy, as expectations of recovery prompted investors to take on more risk and eroded demand for safe-haven currencies such as the greenback.

That dynamic, which pushed the dollar to a 10-month low on the six-currency basket last week, could be changing as the market speculates that rates could rise sooner than expected, analysts said, although they warned this could be premature.

Traders said part of the dollar's gains on Friday stemmed from players correcting short positions accumulated in the past few months.

The market seems to have focused on the U.S. economic fundamentals themselves in the wake of better-than-expected jobs data, which is lagged data, said a trader at a Japanese trust bank.

But it remains to be seen whether this dollar buying will last. I think that the dollar will again stay under selling pressure as more debt issuance is coming this year, he said.

The dollar index dipped 0.3 percent to 78.747, having jumped more than 1 percent on Friday.

Part of U.S. dollar's snap, crackle and pop can be attributed to the fact that it has been under almost relentless assault for much of the past several months, said David Watt, senior currency strategist at RBC Capital. A relief rally was overdue.

The euro rose 0.2 percent to $1.4205 EUR=, after falling more than 1 percent on Friday, but was below its best level this year of $1.4448, set on trading platform EBS last week.


The dollar fell 0.3 percent to 97.21 yen after hitting its highest in about eight weeks of 97.79 yen on Friday, with traders citing dollar-selling by Japanese exporters.

Dollar/yen risk reversals fell sharply in the wake of the U.S. jobs data, with one-month risk reversals for dollar/yen favouring yen calls by 0.55/1.3 percent JPY3MRR=ICAP. The bid rate dipped to 0.50 percent at one point, the lowest since May.

The fall in risk reversals likely reflects a decline in the risk of the yen surging beyond 95 to the dollar, said Takahide Nagasaki, chief FX strategist for Daiwa Securities SMBC.

But that does not mean the dollar is poised to rally above 100 yen, he said. Unless a scenario for U.S. interest rates to head higher becomes more realistic, I think the dollar will rise to 100 yen at best, Nagasaki said.

A focal point this week is a two-day meeting of the Federal Reserve starting on Tuesday.