LONDON (AFX) - The yen was weaker against the dollar in early trade as investors took profits after recent gains, dealers said. The reversal in recent yen gains was also fuelled by weakness in Japanese equities, which have been artificially buoyed by government curbs on short-selling, they added. Investors are refocusing on the fundamentals, as Japan's economy remains crippled by the banking sector's spiralling bad debts. "Given the situation in Japan, it's a natural reaction," Deborah Reed of Bank of America said. The yen is likely to fall further, and drop as low as the 135 level, Reed said. "The trend is for it to go south," she said. However, the scope for falls today is set to be limited ahead the US retail sales figures due at 1.30 pm and Federal Reserve chairman Alan Greenspan's speech on the economy, who is unlikely to depart from the cautiously optimistic tone he adopted last week, dealers said. "The major currencies are likely to be stable ahead of the retail sales numbers," Reed said. Michael Klawitter at West LB said the US retail sales are likely to be strong. However, Klawitter said that although the data "will offer some distraction, the overall sentiment is unlikely to change". The euro was slightly firmer against the dollar, but remained trapped within a very tight range. Kamal Sharma at Commerzbank likened the price moves in euro-dollar overnight to that of a public holiday, with just 12 ticks separating the high and the low. "It's hard to see what would push it out of the other end," Reed said, noting that the US recovery is already priced in. "Further signs of confidence in numbers won't add anything new," she said. A fall in Treasuries on the back of a Federal Reserve interest rate hike could provide a catalyst to drive the euro out of its rut, Reed said. Any comments about the economic prospects for the euro zone out of today's meeting between French and German finance ministers and central bank governors could give the euro some direction later. Sterling was weaker against the dollar as traders continued to close short positions following yesterday's news of M&A flows to the US after Amersham PLC's purchase of Amersham Biosciences from Pharmacia Corp for 1 bln usd. However, speculation about the UK's adoption of the euro, yesterday's soft domestic manufacturing data and a potential rise in national insurance contributions are also weighing on sterling, Reed said.