Against the Japanese currency, the dollar last stood near 83.46 yen, steady from late U.S. trade on Friday, having retreated from an 11-month high of 84.187 yen on Thursday. - AP photo

SYDNEY/SINGAPORE: The yen stayed on the defensive on Monday with the euro reaching a fresh five-month high against the Japanese currency, while the dollar nursed losses following a setback late last week.

The euro rose as high as 110.15 yen at one point on trading platform EBS, its highest level since late October. It later pared its gains and was last changing hands at 109.91 yen, steady from late U.S. trade on Friday.

In another sign of the yen's recent weakness, the Australian dollar rose to 88.62 yen, its highest level since May 2011. The Australian dollar last stood at 88.41 yen, up 0.2 percent from late U.S. trade on Friday.

The yen's status as the currency of choice in funding carry trades was cemented last month after a surprise easing by the Bank of Japan. Additionally, the recent surge in U.S. Treasury yields has made the greenback less appealing as a funding currency versus the yen.

As a result, currency speculators have increased their bets against the yen. Their net short position in the yen rose to 42,380 contracts in the week ended March 13, the highest in 11 months, data from the U.S. Commodity Futures Trading Commission released on Friday showed. [ID:nL2 E 8EGE4S]

Traders, though, said the yen could see some correction this week if rising oil prices hit risk sentiment. Oil prices surged on Friday due partly to tensions over Iran's disputed nuclear programme.

“With a recession in the euro zone now widely expected to significantly slow global output as a whole, investors' hopes have turned to the emerging pickup in the U.S. to act as a counterweight,” said Ilya Spivak, currency strategist at DailyFX.

“If fears that an oil price spike will snuff out the U.S. recovery again begin to multiply, souring sentiment will push capital out of risky assets like stocks and into safe havens including Treasury bonds. This will weigh on yields anew, allowing the yen to correct higher,” he said.

Indeed, data last Friday showed U.S. consumer prices rose the most in 10 months in February as the cost of gasoline spiked. Thankfully, the report also showed few signs of underlying inflation building.

The dollar was little changed against a basket of currencies at 79.801, after having dipped around 0.5 percent on Friday.

Against the Japanese currency, the dollar last stood near 83.46 yen, steady from late U.S. trade on Friday, having retreated from an 11-month high of 84.187 yen on Thursday.

Whether the dollar rises further against the yen in coming months will depend on the Bank of Japan's monetary policy, said Ray Farris, chief strategist for Asia fixed income for Credit Suisse in Singapore.

“If the BOJ continues to, month after month, push with new monetary easing measures and does enough to convince the domestic market in Japan that it is serious and credible in trying to raise the inflation rate to about 1 percent, then dollar/yen can probably continue to rise,” Farris said.

“But it's still unclear just how aggressive the BOJ is  willing to be,” he said.

The dollar could end up higher than Credit Suisse's forecasts of 80 yen in three months and 83 yen in 12 months, given how U.S. yields have started to rise, Farris said.

“But unless the BOJ continues to surprise the market with new measures, we tend to think that dollar/yen has probably overshot a little bit,” he added.

The euro held steady at $1.3168, well off last week's trough near $1.3004.