* Dollar rises to highest level against yen since January
* Euro refreshes one-year lows vs USD in light trade
* U.S. Labor Day holiday dampens market activity
* Aussie slips after RBA holds policy steady as expected
By Lisa Twaronite and Ian Chua
TOKYO/SYDNEY, Sept 2 The dollar took advantage of thin conditions to overcome an options barrier and ascend to its highest level since January against the yen on Tuesday, while the languishing euro plumbed one-year lows against the greenback on expectations of easier euro zone policy ahead.
The moves followed a mostly aimless session overnight with market activity subdued due to the Labor Day holiday in the United States.
"Today was very kind to people who are bullish on the dollar, even with no major fresh factors," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"Against the yen, the dollar might have trouble topping the 105 level for now, but that depends on the direction of U.S. Treasury yields, and U.S. data later in the session," he added.
Later on Tuesday, an Institute of Supply Management report on the U.S. manufacturing sector could provide further evidence of economic improvement and highlight the diverging paths between the United States and euro zone.
The common currency last edged down to $1.3123, after dropping as low as $1.3115. The euro drifted in a narrow range of $1.3119 to 1.3146 for all of Monday.
Against the yen, the greenback jumped 0.5 percent 104.83 yen , after triggering stop-loss orders above an options-related barrier at 104.50 yen, rising as high as 104.87. That brings January's 2014 high of 105.45 in view, if barriers ahead of the 105-yen level can be overcome, traders said.
The otherwise beleaguered euro benefitted from a cross-trading tailwind from the yen's weakness against the dollar, and soared 0.5 percent to 137.53 yen.
The Bank of Japan will meet this week, but is expected to hold monetary policy steady for now despite a spate of weak economic data last week.
The ongoing crisis in Ukraine and the risk of an imminent policy easing by the European Central Bank (ECB) have combined to pin the euro down against its U.S. counterpart.
Data on Monday showed euro zone factories barely increased prices last month, and manufacturing activity in France fell at the fastest pace in 15 months. A separate report confirmed the German economy contracted for the first time in over a year in the second quarter.
The data kept alive the possibility of fresh stimulus from the ECB as early as Thursday.
French President Francois Hollande and ECB President Mario Draghi agreed on Monday that deflation and weak growth were threatening the European Union's economy, an official in the president's office said.
Persistent speculation that the ECB will have to embark on a bond-buying program in the footsteps of the Fed and Bank of Japan have pushed euro zone bond yields down sharply.
Both German and French 2-year yields are now below zero percent.
By contrast, U.S. Treasury yields pulled away from recent lows, with the yield on the benchmark 10-year U.S. Treasury note at 2.366 percent in Asia, well above its U.S. close of 2.345 percent on Friday ahead of the U.S. holiday weekend.
The Australian dollar slipped about 0.4 percent to at $0.9249, after that country's central bank kept interest rates at record lows for the 12th straight policy meeting on Tuesday and seemed content to stay on the sidelines for a while to come as the economy wrestles with a waning mining boom.
The Reserve Bank of Australia (RBA) said the currency was overvalued by most measures but stopped short of actively trying to talk it down.
The Aussie has been surprisingly resilient in light of disappointing surveys that showed growth in its largest trading partner, China, may be faltering again. (Editing by Richard Pullin and Simon Cameron-Moore)