* Yen continues to rebound from 4-1/2 year lows
* Euro edges up versus dollar but gains seen limited
* Subdued trade as U.S. and UK markets closed for holidays
By Jessica Mortimer
LONDON, May 27 (Reuters) - The yen rose on Monday, staying near a two-and-a-half week high against the dollar, as weak equity markets encouraged investors to take profit on the safe-haven Japanese currency’s steep falls.
The euro also edged up against the dollar, helped by falls in Italian and Spanish borrowing costs. Trading was quiet, however, with British and U.S. markets closed for a public holiday.
The dollar was down 0.3 percent at 100.96 yen, close to Friday’s trough around 100.66 yen, its lowest since May 10.
Sharp falls in equity markets last week after the U.S. Federal Reserve hinted it may soon scale back monetary easing provided an excuse for a correction after the dollar rose nearly 20 percent this year to hit a 4-1/2 year peak of 103.74 yen.
A 3.2 percent fall in Japan’s Nikkei share index on Monday encouraged further dollar selling, with market players shrugging off a small rebound in European stocks.
“It’s reasonable to expect that we can have a few days of correction in dollar/yen ... There had been very large inflows into the Nikkei and huge speculative buying of dollars and selling of yen,” SEB chief currency strategist Carl Hammer said.
Positioning data showed speculators increased long dollar positions to their highest since at least June 2008 in the week to May 21 and increased short yen positions. Many of them may now be looking to take profits on those positions.
But most analysts expect the yen will resume its recent downtrend as a result of the Bank of Japan’s aggressive monetary easing announced in early April.
“We still think in the medium to longer term we will see a weaker yen. In the short term it is in a corrective phase, but the dollar should keep above 100 yen,” Antje Praefcke, currency strategist at Commerzbank in Frankfurt, said.
The dollar held below chart resistance at 101.07 yen, the 21-day moving average, while traders said it may be influenced by reported options expiries due later at 100.75 and 101 yen.
The dollar index, which measures the dollar’s value against a currency basket, was down 0.1 percent at 83.609 after dropping around 0.7 percent last week.
The euro was up 0.1 percent against the dollar at $1.2944, though traders reported offers above $1.2970. But it fell against a firmer yen and was last down 0.3 percent at 130.71 yen.
The single currency faced chart resistance at the 55-day moving average at $1.2983 and the 21-day average at $1.2997, with investors wary the European Central Bank may opt to cut interest rates further.
ECB Executive Board member Joerg Asmussen said the central bank would stick to expansive monetary policy, though it should be wary of dropping its deposit rate below zero.