The central bank's 16 straight increases in short-term rates to 5 percent had boosted the dollar's yield advantage in 2005 and fired a rally in the U.S. currency.

But anticipation of a coming Fed pause, along with worries that Washington wants a weaker currency to help curtail its massive trade deficit, have all undermined the dollar this year.

Kikuko Takeda, currency strategist at Bank of Tokyo-Mitsubishi UFJ, noted the dollar is back to where it was before the minutes of the Fed's May meeting, released last week, helped revived expectations for a move in June.

"It was just a return to the starting point and dollar/yen is still rangebound. To confirm the dollar bottom at this stage, we need something from the global imbalance theme," she said.

The call by Group of Seven industrial powers for China and emerging Asian countries to allow more currency appreciation added fuel to a month-long dollar sell-off in April.

The euro has been boosted by the European Central Bank's expected string of rate increases, with speculation rife the ECB could boost rates at a meeting this week by a whopping half-percentage point to 3 percent.

Upbeat data in Japan helped reinforce the case for the Bank of Japan to begin lifting rates from zero as soon as July, with a report showing capital spending rose a robust 13.9 percent in the first quarter from a year earlier.

But with interest rates in Japan still well below those elsewhere, investors have not yet flocked to the yen. For the year the euro is up more than 9 percent against the dollar while the yen has gained roughly 5.5 percent.

By 0215 GMT, the dollar slipped to 111.60 yen from 111.75 yen in late New York trade on Friday, mainly due to selling by Japanese exporters, traders said.

The dollar hit an eight-month low near 109 yen on May 17 but has since bobbed between 111 yen and 113 yen.

The euro edged up to $1.2935, not far from the one-year peak of $1.2972 struck in mid-May on electronic trading platform EBS. Against the yen, the single currency was flat near 144.35 yen.

A nearly 1 percent jump in gold prices also hampered the dollar, which tend to move inversely to each other. Gold climbed to $643.25 after having rebounded sharply from a five-week low hit at the end of last week.

Fed policymakers have made clear further credit tightening would depend on the shape of incoming economic data and that inflation is running hotter than they expected just a few months ago.

Futures on the fed funds rate still see a roughly 45 percent chance of a rate increase at the June 28-29 meeting, mainly because of the pick-up in inflation. All eyes are now turning to the May consumer price index due next week.

Among Monday's big events, at 1815 GMT Fed Chairman Ben Bernanke, ECB President Jean-Claude Trichet and BOJ Deputy Governor Toshiro Muto all participate in a panel discussion in Washington at the International Monetary Conference.

The U.S. Institute for Supply Management's service sector survey, due at 1400 GMT, is expected to show growth moderating, with the headline index forecast to dip to 60.0 in May from 63.0 in April

U.S. Treasury Secretary nominee Henry Paulson makes the rounds in Washington, meeting with Senator Chuck Grassley, chairman of the Senate Committee on Finance.

"The gains are a combination of everything but most importantly it's Iran," said broker John Brady from ABN AMRO in New York. "We've had mixed messages before but it certainly stokes fears."

Tension between Iran and the West over Tehran's nuclear program have helped drive oil's 20 percent rally this year.

Iranian officials have previously ruled out using oil as a weapon in their nation's nuclear standoff with the West, but Khamenei's comments suggested Iran could disrupt supplies if pushed.

U.S. Secretary of State Condoleezza Rice reacted to his comments on Sunday by counseling a wait-and-see approach.

Washington has offered to join European countries in talks with Iran about the nuclear program, but says Iran must first suspend uranium enrichment. Iran has so far rejected the demand, saying enrichment is a national right.

President Mahmoud Ahmadinejad said on Saturday Iran will consider proposals on incentives to stop nuclear work from the United States, Russia, China, France, Germany and Britain but also insisted that the crux of the package was unacceptable.

Oil prices were also boosted by production problems at U.S. refineries during the start of peak summer fuel demand.

"We're in the driving season and the hurricane season, so we're in the mode where the market seasonally trades higher," said Brady.

Oil product futures led gains on Monday, with gasoline up 1.2 percent at $2.2246 a gallon while heating oil rallied 1.2 percent to $2.0376 a gallon.

Three south Texas plants were restoring production on Sunday and receiving tankers into Corpus Christi harbor as it reopened following an oil spill, after urgent repairs and severe thunderstorms hurt production at five U.S. plants.

The disruptions come at the start of what is expected to be another busy storm season in the U.S. Gulf, where last year's hurricanes devastated oil facilities and drove prices to record highs.

OPEC producers agreed last week to leave output limits unchanged and keep pumping at near full rates in a bid to ease prices, which they worry will spur inflation that could slow economic growth and sap oil demand.

In OPEC member Nigeria, kidnappers freed eight foreign oil workers on Sunday, two days after they were seized in an unprecedented raid on an exploration rig far offshore.

Attacks onshore or in shallow water are frequent in the Niger Delta, but this showed that even deep offshore facilities are no longer safe. A series of militant attacks have already cut a quarter of output from the world's eight biggest crude exporter.

The Nikkei was down 66.05 points at 15,723.26 as of 0106 GMT. It rose 1.84 percent on Friday.

The TOPIX index was down 0.64 percent at 1,595.83.

Toyota, the world's second-biggest auto maker, was down 1 percent at 6,060 yen. Rival Nissan Motor Co. Ltd. lost 1.7 percent to 1,349 yen.

Komatsu Ltd., Japan's biggest construction machinery maker, which posts 60 percent of its sales abroad, dropped 1.9 percent to 2,270 yen.

The falls followed Friday's data showing that 75,000 jobs were created in the United States in May, far short of forecasts for a 175,000 rise and an actual 126,000 increase a month earlier. The figures added to evidence of slowing economic growth and falling chances of the U.S. Federal Reserve raising overnight interest rates again this month.

"People will begin asking what on earth the U.S. economy is doing given such a big, unexpected fall in new job creation," Nomaguchi said.

On the other hand, resource-related stocks in Tokyo were bought on a rise in oil prices due to a row over
Iran's insistence that it would go ahead with its nuclear work.

Nippon Mining Holdings Inc., operator of Japan's largest copper smelter and fifth-biggest oil refiner, jumped 4.5 percent to 1,018 yen.