The euro edged up against the dollar on Monday but was below early highs as investors speculated European bank stress tests weren't strict enough to support a rally in the euro zone single currency.
Demand for the yen rose as appetite for risk faded, with European shares sliding and U.S. stock futures lower. Still, analysts said euro gains may not wane completely as recent data in the region had been supportive for the currency.
Despite the market's single-minded focus on the stress tests the more important story was the surprisingly strong economic data from the region (last week), said Boris Schlossberg, a director for currency research at GFT in New York.
Fear of a euro zone debt crisis and its impact on European banks drove the euro below $1.19 last month, its lowest level since 2006, but it began a swift recovery in July and hit a 10-week high above $1.30 last week.
That was partly driven by data showing the euro zone economy has been holding up better than anticipated, even as governments tighten their belts to reign in large deficits.
Relief over the results of the tests, which only seven of 91 banks failed, helped push the euro 0.2 percent higher against the dollar at $1.2923 EUR=. But the currency came off a session high of $1.2958.
Technical analysts said the euro may still push towards $1.3125, the 38.2 percent retracement of the December to June move. To do that, however, it would need to sustain a move above $1.30, a level it has not retested since hitting a 10-week high around $1.3028 early last week.
The euro's downside was also seen limited while it remained above support at $1.2870 -- its 100-day moving average -- and last week's low around $1.2730, leaving it hemmed in within a range for the time being.
Some said the euro's gains could also be constrained by this week's redemption of maturing euro zone bonds and coupon payments worth some 45 billion euros, according to Citi estimates.
Data from the Commodity Futures Trading Commission showed currency speculators cut net short positions in the euro. Net shorts fell to 24,251 contracts in the week to July 20 compared with 27,050 in the prior week. [IMM/FX]
The stress tests failed to inspire much of a euro/dollar rally but at the same time there is no reason for bears to start selling the euro aggressively either, said Roberto Mialich, currency strategist at Unicredit in Milan.
The yen gained broadly as investors stepped back from risk-taking.
The euro hit a seven-week high of 113.49 yen EURJPY=R as dealers unwound long yen positions, but then ran into offers from Japanese exporters around 113.30/50 yen.
It was last down 0.2 percent at 112.64 yen, helping to pull the dollar down 0.4 percent to 87.10 yen JPY=.
The dollar was expected to remain under pressure after recent weak U.S. housing and manufacturing data. Economists have steadily marked down forecasts for Friday's U.S. second quarter gross domestic product numbers.
The Australian dollar came off a fresh 10-week high of $0.8990 AUD=D4, hit on interest rate differentials with the United States. (Additional reporting by Jessica Mortimer in London; Editing by James Dalgleish)