TOKYO: The euro hit a six-week high against the dollar on Monday as upbeat data on the Chinese economy boosted risk sentiment, reversing earlier losses triggered by a credit downgrade of the euro zone rescue funds late last week.
Despite encouraging Chinese manufacturing surveys, however, the Australian dollar dipped as disappointing local retail sales cemented expectations that the Reserve Bank of Australia will cut interest rates on Tuesday.
"The market was initially cautious on the euro after the credit downgrade of rescue funds. But sellers are being forced to buy it back now," said a trader at a Japanese bank.
The euro rose to as high as $1.3048, its highest level since Oct 23 and last stood at $1.3028, up 0.3 percent from late US levels last week.
It has important resistance levels at around $1.3050, including a long-term trendline connecting its peak hit in April and August of 2011 as well as a 76.4 percent retracement of its decline from September to November this year.
The final reading for the HSBC China Purchasing Managers' Survey (PMI) rose to 50.5 in November from 49.5 in October, suggesting the pace of activity in its manufacturing sector quickened for the first time in 13 months in November.
The findings, coming after China's official PMI published on Saturday also rose, boosted hopes of recovery in the world's second-biggest economy, although there were signs Beijing is still relying too heavily on state-led investment rather than the private sector.
The euro initially fell in Asia after Moody's cut its rating on the European Stability Mechanism (ESM) to Aa1 from Aaa on Friday, keeping a negative outlook.
It also lowered its provisional rating on the European Financial Stability Facility to (P)Aa1 from P(Aaa), citing a recent downgrade of France's sovereign rating.
Traders said short-covering in the euro was active particularly against the Australian dollar, which was hit by soft retail sales data.
The euro rose more than 0.7 percent against the Aussie to hit one-month high around A$1.2530.
Against the US dollar, the Aussie fell 0.3 percent to $1.0400, falling as low as $1.0393 at one point.
GOING OVER THE CLIFF
"My vague feeling at the moment is the euro could rise gradually in line with shares on receding worries over the US fiscal cliff, Greece and southern Europe, as policymakers kick the can further," said a trader at a European bank.
Still, any further recovery in the euro is more likely to be choppy than steady, given that there will likely be more twists and turns in the debt saga in both United States and Europe.
Later on Monday, Greece plans to unveil details of a bond buy-back crucial to efforts by foreign lenders to trim the country's ballooning debt, hoping the terms will draw enough investors and unblock vital aid.
On the other hand, with less than a month left before sharp fiscal tightening is due to set in, there was little apparent progress in talks to mitigate its impact on the US economy.
Treasury Secretary Timothy Geithner said on Sunday that he "can't promise" that the United States won't go over the cliff, insisting it is up to congressional Republicans.
"Resolution of the US fiscal cliff still seems some way off, and it is increasingly likely that a comprehensive agreement will be delayed into the new year, meaning the economy may go over the cliff in January only to be hauled back up again soon after," said Simon Hayes, analyst at Barclays Capital.
Concerns that the looming avalanche of tax hikes and spending cuts could push the US economy into recession helped the yen stay above a 7-1/2-month low hit last month against the dollar.
The dollar shed about 0.2 percent to trade at 82.33 yen , falling further from last month's peak of 82.84 yen.
The yen has been under pressure on expectations that a likely change in Japan's government later this month would lead to aggressive monetary easing.
Data from US regulator showed on Friday speculators bets against the yen rose to the highest level since mid-2007 last week at 79,466 contracts.
But Osamu Takashima, chief FX strategist at Citibank in Tokyo, said that may no longer be the case.
"Speculators' net euro short positions have shrank to about a third of its peak, which could suggest they still have capacity to take risk overall. I don't expect their net yen short positions to rise around the record peak around 200,000 contracts but speculators may have a deeper pocket than you would think," he said.
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