LONDON The euro dipped against the dollar on Monday as European Central Bank president Mario Draghi said the euro's appreciation added downside risks to inflation and reiterated there were risks to the euro zone economic outlook.
Its drop was limited, however, with traders still inclined to buy the currency on dips, especially against a broadly weaker yen. The Japanese currency resumed broad falls after Japan signaled it would push ahead with aggressive monetary easing, having escaped criticism from G20 countries at the weekend.
But trading volumes were thin, with U.S. markets closed for President's Day.
The euro was down 0.1 percent at $1.3348, having dropped to around $1.3333 following Draghi's comments. It remained above chart support around $1.3310, the 38.2 percent retracement level of its Nov-Feb rally.
"Draghi's comments prompted a bit of a dip in the euro but that just provided better levels to buy the currency," said Jeremy Stretch, head of currency strategy at CIBC.
"There is still enough justification to buy the euro on dips, helped in part by the gains in euro/yen after the G20 seemingly gave the green light for countries to continue measures which weaken their currencies."
Speaking before the European Parliament, Draghi said the euro's exchange rate was not a policy target but was important for growth and stability, adding that appreciation of the euro "is a risk".
The euro has been under selling pressure in the wake of data recently revealing a deeper-than-forecast euro zone recession and on concerns about the outcome of an election in Italy at the weekend.
But it remained higher on the day against a broadly weaker yen, trading up 0.3 percent at 125.46 yen. This left it roughly midway between Friday's two-week low of 122.90 and a 34-month high of 127.71 yen hit earlier this month.
Against the yen the euro has gained more than 9.5 percent this year, causing some European policymakers to voice concern about its steep ascent.
But European Central Bank policymaker Ewald Nowotny said on Monday the euro was moving within standard ranges and the euro's exchange rate should not be dramatized.
The yen resumed falls as Japan's Prime Minister Shinzo Abe said buying foreign bonds was an option for the central bank.
The dollar was up 0.5 percent to 93.93 yen, recovering from a low of 92.20 hit on Friday and within reach of a 33-month peak around 94.47 set a week ago. But traders said it may run into selling before a reported option barrier at 94.50.
The dollar has risen around 20 percent against the yen since mid-November, when prospects of a new government sparked talk of aggressive monetary easing.
Citi have added a new long dollar/yen spot position to their leveraged trade ideas portfolio and are targeting 95.70 yen with a stop loss at 92.55 yen, they said in a note to clients.
But strategists said while the yen was likely to continue weakening, its fall could lose momentum as investors became wary of betting on further yen weakness until there was more clarity on the next Bank of Japan governor.
Abe's choice for BOJ governor is expected to be announced in coming days. While some expect Asian Development Bank head Haruhiko Kuroda to be the next chief, sources told Reuters that former top financial bureaucrat, Toshiro Muto, who is seen as less radical, was the front-runner.
"You are likely to see some consolidation in dollar/yen, the big unknown is who will get appointed as the new BOJ Governor so it is difficult to put on massive positions beforehand," said Saeed Amen, currency strategist at Nomura.
The dollar rose to a 6-week high against a basket of currencies, with its index .DXY hitting 80.727, before dipping back to last trade up 0.1 percent at 80.641.
(Additional reporting by Anooja Debnath; Editing by Toby Chopra)