TOKYO: The Australian dollar dropped to a two-month low on Thursday after data showed China's manufacturing activity shrank in March for a fifth straight month, underscoring concerns about growth slowdown in the world's second largest economy.
After HSBC flash PMI showed the overall rate of contraction deepening and new orders sinking to a four-month low, the Aussie fell 0.7 percent to $1.0383, hitting the lowest level since late January. It had fetched $1.0477 prior to the release.
The activity slowdown boosts expectations that Beijing will relax monetary policy to underpin growth, although inflation risks uncovered by the survey highlight the dilemma facing policymakers who are determined to contain price pressures.
"Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authorities," HSBC chief China economist Qu Hongbin said.
The data weakened the Aussie dollar as it added to concerns about China's demand for Australian commodity exports.
The Aussie has already fallen 4 percent this month. On Thursday it breached major support at the 200-day moving average of 1.0402. More chart support was at the 100-day moving average of 1.0373 and the base of the Ichimoku cloud at 1.0354.
The Aussie also hit this year's low on the euro at 1.2738 , marking the fifth consecutive day of losses.
But the single currency nursed most of the losses, having slipped from near five-month high on the yen and two-week highs against the greenback after worries over Spain's finances put fresh pressure on peripheral euro zone bonds.
The euro was last up 0.1 percent at $1.3232, having fallen from the overnight high of $1.3286. Its rise stalled ahead of resistance at the 61.8 percent retracement of its Feb-March slide at 1.3300.
Italian and Spanish debt prices fell on concerns about Spain's slow progress in boosting its finances. That benefited German Bunds, whose yields slipped back below 2 percent for the first time this week.
"It's always been hard to talk of any real optimism in the euro zone and the mood there remains extremely fragile," said Teppei Ino, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
"The fire can start spreading out again on the slightest of worries - this time it seems to be affecting the peripheral bond yields. The situation may worsen if the European manufacturing data comes in below forecasts later today," he said.
Against the yen, the euro stood at 110.16, down sharply from the previous day's high of 111.43. It too failed to clear an important chart resistance at the post-intervention Oct. 31 high of 111.57.
The yen briefly jumped to 83.14 against the dollar after data from Japan showed the country logged in a trade surplus of 32.9 billion yen in February - the first surplus in five months - against a forecast for a 120 billion yen deficit. It was trading at 83.44 before the data was released.
"The trade data was a positive surprise as falls in exports were smaller than expected. But it is too early to conclude the trade balance has returned to a surplus trend," said Taro Saito, senior economist at NLI research institute in Tokyo.
The yen has fallen 8 percent versus the dollar in 2012, with the greenback rally helped by the Bank of Japan's easing steps and as the country's trade balance was tilted to deficit on the back of fossil fuel imports after most nuclear reactors went off-line after the Fukushima nuclear accident last year.
The dollar was last down 0.2 percent and fetched 83.26 yen.
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