NEW YORK (Reuters) - The dollar fell against the yen on Monday after its swift rise to a 2-1/2 year high last week as investors considered the move too far, too fast but rose against the euro on speculation the European Central Bank could hint at future rate cuts.
Without U.S. economic data to drive the New York session one way or another, currencies are likely to trade in the day's ranges and look to events later in the week or react to changes in other asset classes such as stocks.
"With no U.S. economic data on the docket today, currency markets could continue their quiet consolidative tone, but if equities come under some selling pressure, the yen crosses could follow and euro could once again test the 1.3000 barrier as the day proceeds," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management.
The dollar was down 0.2 percent at 87.95 yen, off Friday's peak of 88.40 yen using Reuters data, its strongest since July 2010. Traders said the dollar could extend its fall if it broke below reported stop loss sell orders at 87.50 yen.
Expectations of aggressive monetary easing by the Bank of Japan has seen the dollar rally more than 8 percent versus the yen since early December. The BOJ meets on January 21-22.
Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets in London said there was a risk the BOJ's actions might fall short of market forecasts, leading the dollar to weaken.
"There is a risk that markets got a little bit carried away and that we don't see as much as we were hoping for (from the BOJ) and we see a pullback in dollar/yen."
Traders also said the yen found some support on worries that Japanese mobile operator Softbank Corp's deal to buy 70 percent of U.S. carrier Sprint Nextel Corp could run into complications.
The euro fell 0.5 percent to 114.65 yen, moving away from Wednesday's 18-month high of 115.99 yen. It also eased 0.2 percent against the dollar to $1.3043, just above last week's three-week low.
Analysts said the euro was likely to remain under pressure as markets refocus on the euro zone's debt crisis and before the ECB meeting later this week. Any indication of monetary stimulus or comments on economic weakness could push it lower.
"If the ECB doesn't cut rates we could see a minor uptick in the euro," said John Hardy, FX strategist at Saxo Bank in London. "The bigger risk ... however is if they hint at the possibility of more easing, which will weigh on the euro."
Late last week, the dollar gained broadly after Federal Reserve minutes showing some policymakers considered ending their bond-buying stimulus as early as this year.
Further comments from two top Fed officials suggested on Friday the central bank could halt its asset purchases this year.
Some analysts said the data suggested the euro had limited scope for further short-covering rallies as investors cut previous bets on the euro falling.
"We have seen a peak in the euro's strength. There was perhaps excessive confidence in the euro as systemic risks in the euro zone remain," Saxo's Hardy said.
Investors will also look at Spanish and Italian bond auctions towards the end of the week. Healthy demand could help the euro gain against the dollar.
(Reporting By Nick Olivari; Editing by Theodore d'Afflisio)