The euro fell against the dollar and yen on Monday as weak European manufacturing data prompted investors to contrast the outlook for the euro zone with the improving economy.

The euro remained vulnerable to renewed bouts of selling after the regional manufacturing survey, analysts said, as investors took a cautious view of prospects for the global economy even after strong Chinese factory data.

PMIs out of Europe are another reminder of the extent economies have gone down, said Omer Esiner, chief market analyst with Commonwealth Foreign Exchange in Washington, D.C. Strong U.S. data this week is likely to see the dollar strengthen on rising yield appeal.

The euro fell 0.2 percent against the dollar at $1.3320, though still within a cent of the recent one-month high of $1.3385, according to Reuters data. Analysts said that peak will provide resistance after the euro has repeatedly failed to breach it.

Traders said negative sentiment towards euro zone assets arose on reports the Bundesbank would not accept the bonds of several countries, including Portugal, as collateral. Germany's central bank later denied the reports.

There's an increasing risk of a more prolonged recession in Europe and economic fundamentals argue in favor of a further downward adjustment in the euro, said Lee Hardman, currency analyst at BTM-UFJ in London.

The market's focus will switch to U.S. ISM manufacturing data to be released at 1400 GMT, which is expected to show continued expansion in contrast to the euro zone.


The low-yielding yen, which tends to fall when risk appetite increases, recouped earlier losses, with the dollar down 0.2 percent at 82.59 yen and the euro down 0.4 percent at 110.04 yen.

It seems like investors remain cautious with service sector data from China still to come this week and nothing to indicate an imminent policy response from the Chinese to the slowdown in their economy, said Valentin Marinov, head of European G10 currency strategy at Citi in London.

It's a week ahead of the long weekend with thin liquidity, making investors reluctant to express strong views and which limits the scope for meaningful returns ahead of Easter.

The Japanese currency was undermined by a weaker-than-expected reading of the Tankan survey of sentiment at big Japanese manufacturers, which put the spotlight on whether the Bank of Japan will ease monetary policy further as early as next week.

The Australian dollar was up around 0.4 percent for the day at $1.0376, off a high of $1.0449 touched earlier in the global session.

The currency tends to benefit from any signs of improvement in the Chinese economy due to Australia's strong trade links with the country. But many analysts have recently expressed concerns it is overvalued.

The Chinese recovery is modest ... We like to sell Aussie on any rally, said George Saravelos, G10 currency strategist at Deutsche Bank in London.