The dollar held close to a 16-month low against the Japanese yen on Monday as investors remained wary about the greenback's outlook, though a rebound in US stock futures offered some support to relatively high-yielding currencies also including the Australian dollar.

With positioning against the dollar at a one-year high, according to CFTC data, and the greenback posting its biggest weekly drop in a month against a basket of currencies last week, some investors prepared for a bounce.

In early London trading, the dollar was up 0.4 per cent against the yen after falling 1.2 per cent last week, its biggest drop since the week ending February 17, according to Thomson Reuters data.

Global markets were shaken last week after US President Donald Trump had moved to impose tariffs on Chinese goods, edging the world's two largest economies closer to a trade war, but latest reports indicated a slightly more selective stance.

The United States had asked China in a letter last week to cut the tariff on US autos, buy more US-made semiconductors and give US firms greater access to the Chinese financial sector, the Wall Street Journal reported on Monday, citing unnamed sources.

US stock futures were up 1 per cent in early London trade after major US indices fell sharply on Friday.

“Risk sentiment remains cautious and we remain bearish on the dollar's outlook in the absence of any fundamental changes despite the rate differential factor supporting the greenback,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Against a broad basket of its rivals, the dollar edged 0.14 per cent lower after last week's 0.8 per cent fall.

Political scandal in Tokyo

The dollar's strength against the yen was also due to Japanese factors such as growing views that a political scandal in Tokyo could deepen, with a figure in a cronyism controversy surrounding Prime Minister Shinzo Abe due to testify in Parliament on Tuesday.

The Prime Minister's “Abenomics” economic measures have been a factor in pulling the yen down over the past few years to the benefit of Japanese exporters. Any event that leads to a decline in his support ratings is seen weakening his ability to keep Abenomics in place.

“With worries about the United States and China locking horns on trade issues and Japan's parliamentary testimony coming up on Tuesday, few participants are willing to buy the dollar,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

According to calculations by Reuters and Commodity Futures Trading Commission data released on Friday, speculators' net short positioning on the yen shrank rapidly to roughly 22,000 contracts in the latest week, the smallest since November 2016, from a net short position of about 79,500 contracts.

The dollar struggled against the euro with the common currency up 0.3 per cent at $1.2386. Investors remained broadly bullish on the euro's outlook despite disappointing survey data last week.

The Australian dollar added 0.6 per cent to $0.7740 and the New Zealand dollar gained 0.8 percent to $0.7285, in a further sign that risk aversion was fading from the markets for now.

comment COMMENT NOW