By: Hillel Fuld

The USD was playing defense on Monday after firm U.S. payrolls data last week eased market fears over chances of a double-dip recession and boosted demand for the EUR and growth-leveraged currencies.

The USD looked vulnerable vs the JPY after failing to maintain its gains following Friday's payrolls data, though caution about Japanese intervention put off further JPY buying. "Looking at price actions after Friday's payrolls data, people seemed to have been well-prepared for a rebound in the dollar/yen.

Thus the dollar will be capped for now," said a trader at a Japanese bank. "But on the other hand, we don't have strong reasons to buy the yen either. I expect the dollar/yen to be stuck in a narrow range," the trader said.

The EUR changed hands at $1.2885 having risen to $1.2898 following the payrolls data on Friday, its highest in two weeks. It faces resistance around $1.2920-35. U.S. non-farm payrolls fell 54,000, the Labor Department said, a much less significant drop than the predicted 100,000.

Private employment, considered a better gauge of labour market health, increased 67,000. The AUD fetched $0.9155, down from late U.S. levels last week but still close to a four-week high around $0.9176 hit after the U.S. payrolls figures. The JPY stood at 84.45 yen per dollar, not far from a 15-year peak of 83.58 hit late in August.

The JPY has been bought in the past few months as investors tend to favor currencies of countries with a current account surplus when they want to avoid risky assets. Positive balance of payments figures also mean greenback selling by Japanese exporters constantly outweighs USD buying by Japanese importers, capping the dollar against the yen.

The dollar/yen has had a very strong correlation with U.S. yield levels in recent months. The lower U.S. yields are, the cheaper the USD is vs the JPY, as lower yields tend to discourage investment in the dollar. On Friday, however, the USD did not make much headway against the JPY even as the payrolls data pushed U.S. yields sharply higher.

Data from the U.S. Commodity Futures Trading Commission showed on Friday that currency speculators trimmed their long positions on the JPY last week but they still have big JPY long positions. Their long positions were reduced to 49,904 from 51,069 contracts the week before. Still, some analysts say the dollar could eventually increase.

"The U.S. dollar appears to be rebounding, which could make for a rise in the dollar/yen to 85-86 yen," said Masafumi Yamamoto, chief FX strategist at Barclays. The NZD dipped slightly at $0.7190, off Friday's four-week peak of $0.7218 after a large scale 7.1 earthquake struck the country's second-largest city, Christchurch, causing widespread damage to infrastructure.