By Kevin Buckland

TOKYO (Reuters) – The safe-haven yen sank to its lowest in nearly three months on Monday, while the risk-sensitive Australian dollar continued to recover from an almost one-month low, as fears of widespread contagion from China Evergrande Group receded.

The yen also fell as higher U.S. yields attracted Japanese investor money, while rising commodity prices helped the and Norway’s crown.

In anticipation of tighter U.S. monetary policy, U.S. yields rose to the highest level since July 1, while the dollar remained in the middle range of its past week relative to major peers.

The euro trades little change at $1.1724, mostly ignoring the developments in German elections over the weekend. It was expected that the Social Democrats would narrowly defeat CDU/CSU’s conservative bloc.

On Wednesday, the Federal Reserve said that they will likely start to reduce its monthly bond purchases in November. Flagged interest rate rises may also follow quicker than anticipated. Half of Federal Open Market Committee members expect a hike next.

In a note to clients, Commonwealth Bank of Australia analysts stated that the USD will likely remain in the “cross-currents of more hawkish FOMC fading worries around an Evergrande default” category.

The risks were skewed towards a more stable USD, with renewed Evergrande fears unlikely to increase market volatility like last week.

Trade has been affected by concerns that China’s 2nd-largest developer Evergrande might default on $305 billion in debt. However, some contagion worries are beginning to recede.

On Monday, China’s People’s Bank injected 100 billion Yuan (or $15.47 billion), into its financial system. This was in addition to the net of 320 billion yuan that it had pumped last week. It is the largest amount since January.

Caixin reports that several Chinese local governments set up custodian accounts specifically for Evergrande projects in order to prevent funds intended for housing projects being diverted.

Before trading at 110.67, the yen fell to 110.81 USD. This was close to its July 7 low.

The benchmark touched 1.466% for a second day on Monday, the highest since July 2.

“The correlation between U.S. bonds yields and has picked up,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.

“USDJPY looks a little stretched, so I’d be wary to chase here, but I would be looking for a re-test of 110.50 as a potential support zone within what is a progressively bullish trend.”

From $0.72205 one week ago, the Aussie gained 0.3% to $0.7282. This is its highest level since Aug. 24, 2008.

The Norwegian crown experienced a slight increase of 0.4%, reaching 8.5537 USD for the first-time since July 6.

($1 = 6.4662 renminbi)