The euro recovered from near one-month lows against the dollar on Monday, aided by a bounce in equity markets, but rallies were hampered by sovereign sales and concerns about the euro zone periphery.
The single currency initially headed lower for a sixth straight day before a slight recovery in European dealing.
The euro has bounced in line with the recovery in equities, but there's an overriding risk-off mode which is weighing on it and I would expect rallies to be capped around the $1.2850 area, said Antje Praefcke, currency analyst at Commerzbank.
At 0736 GMT (3:36 a.m. EDT), the euro was trading with gains of around 0.5 percent versus a broadly weaker dollar at $1.2825, having fallen to $1.2734 on trading platform EBS, its lowest since July 21. European equities were up around 0.4 percent .FTEU3.
Traders reported selling from sovereign accounts, limiting the euro's recovery.
Last week, the single currency fell as yield spreads between government bonds issued by peripheral euro zone countries and German Bunds widened due to concerns over the cost of supporting the Irish banking sector and disappointing Greek economic data.
Positive effects from strong German and euro zone growth figures were limited.
The problem for the euro is that growth is rather concentrated in Germany, with the periphery still struggling, said analysts at Credit Agricole CIB in a note to clients.
Technical analysts noted next support around $1.2700, a trendline taken from this year's low in the $1.1880 area.
The euro recovered from early losses against the yen to trade at 110.20 yen, up 0.2 percent on the day.
Data showing that Japan's economic growth slowed markedly in April-June had helped drag Tokyo shares lower, pulling euro/yen to one-month lows of 109.25 yen on trading platform EBS.
The yen's gains were tempered by caution ahead of a possible meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa later this week to discuss the currency's strength and possible responses.
The yen rose to highest levels in 15 years versus the dollar last week, in a move driven by falling US yields.
A fall in the 10-year U.S. Treasury yield to a fresh 16-month low on Monday was one factor weighing on the dollar against the yen, which traded down around 0.3 percent at 85.90 yen.
Some traders said Japan's weaker GDP data could increase incentives for Japanese authorities to take measures to curb export-sapping yen strength.
Government sources have said it and the BOJ are coordinating to set up a meeting between Kan and Shirakawa that is likely to be in the second half of this week, and that has stirred market speculation that Japanese authorities may soon unveil some type of response on the yen.
(Additional reporting by Masayuki Kitano, editing by John Stonestreet)