The yen and the Swiss franc led a broad rally in safe-haven currencies on Monday, while the euro recovered as investors bet recent declines went too far, too fast, even as investors remained sensitive to risk in euro zone bond markets.

The premium that investors demand to hold 10-year Irish and Greek government bonds rather than German Bunds widened on Monday, while the cost of insuring their debt against default also increased, highlighting investors' concerns about peripheral euro zone economies.

Benchmark 10-year German yields earlier hit a record low on worries about a faltering global economic recovery.

The Swiss franc and the Japanese yen, both used to fund leveraged carry trades, are typically sought in times of market stress. On Monday the euro also rebounded after falling almost 4 percent last week, its largest weekly drop since the week of May 9.

The euro bounced off of a three-week low against the greenback as bargain hunters helped underpin demand for the single currency, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc. in Washington. However, given the market's much more selective mode of late, the euro remains vulnerable to mounting concerns about the health of the continent's banking sector and sovereign debt situation.

In early New York trade, the dollar was down 1.4 percent to 1.0355 francs after going to its lowest since August 6.

The euro was 0.5 percent lower against the Swiss franc at 1.3335, having dropped to its lowest since July 8 earlier. Traders said funds were lightening positions in euro/Swiss franc with sparse liquidity exacerbating the fall.

Spreads in the peripherals are wider, financial stocks are down and the Swiss franc is outperforming on safe-haven demand, said Kenneth Broux, Markets Strategist at Lloyds Banking Group.

The euro gained 0.9 percent to $1.2847 after climbing as high as $1.2871, recovering from one-month lows hit in Asian trade. The early sell-off in the euro marked the sixth straight day of lower daily troughs for the single currency.


The euro gave up earlier gains against the yen, falling 0.1 percent to 109.76 yen and though off the session low, not far from a one-month trough struck in Asian trade.

The yen's gains came despite weaker-than-expected Japanese gross domestic product (GDP) numbers. Anaemic economic growth and a rising currency are likely to pose a headache to Japanese policymakers in coming days.

Investors are wary 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.

Some traders said Japan's weaker second-quarter GDP data could increase incentives for Japanese authorities to curb the yen's strength.

The dollar was down 0.8 percent at 85.48 yen with investors like hedge funds still preferring to go short on the greenback and long on yen as U.S. yields continued to tumble.

The yen will not be driven by Japanese data but whether U.S. yields will head lower, said Gareth Berry, currency strategist at UBS in Singapore. Things are pretty balanced right now but there is a general caution about risk appetite.

The yen rose to its highest levels in 15 years versus the dollar last week, in a move driven by falling U.S. yields.

The 10-year U.S. Treasury yield fell to a fresh 16-month low on Monday as weak economic numbers continued to raise concerns about the world's largest economy.

In other currency pairs, sterling extended gains versus the dollar, hitting the day's high as the UK currency tracked gains in the euro and yen against the broadly weak U.S. currency.

The pound hit the day's high of $1.5673, up 0.5 percent on the day, with gains accelerating after stop-loss orders were triggered around $1.5620 and $1.5640.

In economic news, foreigners were net sellers of U.S. securities in June for the first time in five months, but increased their purchases of long-term instruments such as U.S. government debt, the Treasury Department said.

(Additional reporting by Anirban Nag in London, Editing by Chizu Nomiyama)