Euro notes are pictured in this file photo by Picture: Lee Jae Won / Reuters.

Tokyo - The euro bounced back against the yen on Monday after suffering a sell-off last week in response to weak eurozone data that fuelled speculation of an interest rate cut by the European Central Bank (ECB).

In midday Tokyo trade the euro rose to 138.05 yen from 137.61 yen in New York Friday, its lowest level since early December, while it held steady at $1.3488 against $1.3487.

The dollar strengthened to 102.35 yen from 102.03 yen.

Official data Friday showed eurozone inflation eased to 0.7 percent in January, from 0.8 percent in December, as the bloc struggles to recover from its debts crisis.

The bank's target is for 2.0 percent inflation.

The figures come as the ECB's policy-setting governing council prepares to hold its monthly policy meeting on Thursday, with some analysts tipping a rate cut to head off deflation.

“This result has some now anticipating further easing action from the ECB this Thursday,” National Australia Bank said.

“We rather think they would wait until March when new staff economic projections are available, but (ECB chief Mario) Draghi's press conference is going to be interesting... either way.”

The dollar won support after the US Commerce Department last week said the world's number-one economy expanded 3.2 percent in October-December, well above the 3.0 percent projected by analysts.

There was also some cheer from figures showing a 3.3 percent rise in consumer spending, which is a crucial driver of growth in the United States.

That came a day after the Federal Reserve reduced its stimulus programme by another $10 billion a month to $65 billion, following a similar cut in December.

While the US central bank cited a firming economy for the wind-down, the announcement rattled emerging markets such as India, South Africa and Russia on fears of a capital flight, which in turn sent their currencies diving.

Sentiment took a knock after China released data at the weekend pointing to a slowdown in manufacturing activity in the world's number two economy and key driver of global growth.

That came days after HSBC said its own survey of activity in China had shown a contraction. - Sapa-AFP