The euro edged up against the dollar on Monday after tough talk from monetary policy-makers dented expectations for lower euro-zone interest rates while the yen climbed broadly as investors cut back on risky trades.
Speaking to Japanese reporters over the weekend, European Central Bank President Jean-Claude Trichet stressed that there was no call to either raise or reduce the benchmark rate at last week's policy meeting.
And ECB governing council member Axel Weber told a German newspaper that it would be an exaggeration to say that we are facing a weakening in growth that by itself would slow inflation in such a way as to cause rapid easing.
Citigroup currency strategist David Pais said, The market is interpreting that as no rate cuts being on the agenda for the time being and euro is a bit firmer because of that.
The euro moved back above $1.45 on the comments after last week posting its biggest weekly slide in 1-1/2 years. It last traded up 0.3 percent at $1.4545.
The euro struggled last week after the ECB left interest rates on hold at 4 percent and focused in its policy statement about downside risks to growth while dropping wording about preemptive action against inflation.
The yen, though, rose against both the euro and dollar as softer stock prices in Asia and Europe prompted traders to unwind risky trades financed with cheaply borrowed yen.
The dollar fell 0.5 percent to 106.84 yen while the euro was down 0.2 percent at 155.44 yen.
A weekend Group of Seven industrialized nations meeting in Tokyo had little impact on foreign exchange. Finance leaders focused on the crumbling U.S. housing market and its negative impact on world economic conditions and bank lending.
The language on currencies was largely a repeat of the previous statement, with the G7 saying exchange rates should reflect economic fundamentals. They tweaked comments on China's yuan to say we encourage the need for greater appreciation of the currency, instead of we stress.
The Australian dollar was among the best performing major currencies, rising more than 1 percent against the U.S. dollar to $0.9055 after the central bank warned it would likely need to raise interest rates again to counter inflation.
The Reserve Bank of Australia hiked rates to an 11-year peak of 7 percent last week, and markets now expect another hike in March.
But strategists said it may be tough for the Aussie dollar to hold its gains in the current risk-averse environment.
While we recognize that the RBA hiking rates will increase the yield advantage of the Australian dollar, it is the willingness of investors to buy this yield that remains the main driving factor for the currency, strategists at Barclay's Capital wrote in a note to clients. We therefore continue to expect a weaker Australian dollar going forward, as we continue to expect weak equity markets ahead.
Inflation concerns also nudged sterling up 0.2 percent to $1.9488. Data showing British factory inflation at its highest rate in more than 16 years pared expectations for more rate cuts from the Bank of England.
(Additional reporting by Ian Chua in London; Editing by Andrea Ricci)