LONDON: The offshore yuan was headed for its worst daily decline in over five months on Friday after weak economic data out of China damaged risk sentiment and weighed on the Australian dollar.
China's gloomy factory readings have brought global growth worries to the fore again, which is likely to benefit safe-haven currencies such as the Japanese yen.
"February is starting with a slew of weak manufacturing data across China-sensitive parts of Asia it's a reminder that the risk rally in emerging market currencies, and generally, is built on wobbly foundations," said Societe Generale strategist Kit Juckes. "I expect a risk averse morning and a data-driven afternoon."
The Australian dollar, a proxy for China risk, was the main victim, falling half a percent to 0.7237 while the dollar is set to end the week in the red, losing 0.6 percent on the day against a basket of major currencies.
Still, broader risk sentiment remained fairly robust after a top US negotiator reported "substantial progress" in two days of high-level talks on trade with China.
Markets are now focusing on US jobs data later on Friday. Analysts note that any weakness in the labour market and a fall in wage inflation would only reinforce the dovish outlook for the dollar this year.
The dollar is widely expected to weaken this year as the Federal Reserve turns more cautious about rate increases.
"The outlook for US assets remains relatively uncompelling and investors should be shopping for value elsewhere," said Hans Redeker, global head of currency strategy at Morgan Stanley in London.
"A weak US equity market outlook should keep low-yielders such as the yen and the Swedish crown supported," he added.
On Wednesday, the US central bank held interest rates steady as expected but discarded pledges of "further gradual increases" in interest rates.
The euro was flat at $1.1446 after having fallen 0.3 percent in the last session. The single currency has not managed to gain despite broader dollar weakness as growth and inflation in the euro zone remain weaker than expected.
Sterling, grappling with uncertainty over a deal to avoid a chaotic British exit from the European Union, was flat at $1.3109. Analysts expect the British pound to remain volatile in the coming weeks.
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