LONDON - The pound and Japanese yen edged off multi-month highs against the dollar on Monday as traders, investors and analysts started to speculate whether the greenback's recent bout of weakness was coming to an end.

The dollar climbed 0.7% on the yen to 135.27, bouncing from Friday's three-and-a-half month low of 133.62, while sterling, which hit a more than five month top of $1.2345 in Asian trade Monday, dropped at much as 0.5% to $1.2233 in European hours.

The euro held near the $1.0585 it hit in Asian hours, its highest since June 28.

Trading has become choppier in recent weeks as the dollar rolled down from the multi-decade highs it reached against most peers earlier in the year, boosted by an aggressive sequence of Federal Reserve interest race increases, as investors started to hope the Fed's December meeting will mark the start of a slower pace of hikes.

The dollar index, which tracks the greenback against six peers, fell 1.4% last week, and 5% in November, its worst month since 2010.

But now speculation is growing that 'pivot' narrative has run its course.

"I think this issue about 'peak inflation, peak rates, peak dollar' - I think - is slowly turning into a 'persistence of inflation, a persistence of higher-for-longer interest rates," said Jane Foley, senior FX strategist at Rabobank.

"I think we’re returning to more normal conditions, right now, for the Fed and for the dollar."

U.S payrolls data Friday showed employers hired more workers than expected in November and increased wages, possibly giving the Fed more room to raise rates.

The dollar's aggregate positioning against G10 currencies is now neutral, and at the lowest levels since August 2021, according to ING calculations based on CFTC data.

ING also feels that dollar softening may have run its course for now, given the possibility of the Fed maintaining its hawkish narrative for longer, that relaxing China's COVID restrictions could prove complicated, and that oil and gas prices could rise again.

The other major factor for markets on Monday was China, where several cities have been easing their COVID restrictions. Official messaging about how dangerous the virus is also has changed following recent, unprecedented protests against the government's uncompromising "dynamic zero-COVID" strategy.

This boosted China's yuan, and the dollar fell below 7.0 yuan in offshore trade for the first time since mid September, and was last at 6.9336. It lost as much as 1.5% on the onshore yuan to as low as 6.9449 on Monday, its weakest since Sept. 13.

"It may seem like they are baby steps but nonetheless quite a strong sign of China taking calibrated steps in the direction of reopening," said Christopher Wong, a currency strategist at OCBC in Singapore.

China is soon set to announce a nationwide easing of testing requirements as well as allowing positive cases and close contacts to isolate at home under certain conditions, people familiar with the matter told Reuters last week.

Moves in other majors were largely in line with the bigger picture -- the China-sensitive Aussie dollar was up a touch at $0.6806, and the dollar slid 0.25% on the Swiss franc to 0.9346, just above Friday's near eight-month low of 0.9326.

(Reporting by Alun John in London; additional reporting by Amanda Cooper in London and Ankur Banerjee in Singapore Editing by Simon Cameron-Moore, Crispian Balmer and Chizu Nomiyama)