LONDON: The euro recovered after hitting a three-week low on Monday as euro zone manufacturing data was not as bad as expected, but uncertainty about when Spain would seek a bailout still weighed.
While an audit of Spain's banks failed to throw up any surprise, investors are awaiting the outcome of Moody's rating agency's latest review of Spain's sovereign rating. Europe's fourth-largest economy may be downgraded to junk status, piling pressure on it to seek an international bailout soon.
The euro was slightly higher on the day at $1.2865, recovering from a three-week low of $1.2804 hit early in Asian trade and breaking below support at its 200-day moving average at $1.2823.
Earlier on Monday, weak economic data from Japan, China and other parts of Asia sapped investors' appetite for risk, to the benefit of safe-haven currencies.
The euro faces near-term technical resistance at $1.2960, the 38.2 percent retracement of its Sept. 17-27 slide.
"We will see the euro head lower until Spain applies for a bailout and the probability of that happening could rise if Moody's downgrades Spain," said Adam Myers, senior foreign exchange strategist at Credit Agricole.
"A downgrade could force Spain's hand in seeking a bailout and should see a relief rally in the euro. But until that happens, weak economic data will add to the downward pressure on the euro."
Data on Monday showed France's manufacturing sector deteriorated sharply in September, while the Purchasing Managers' Index (PMI) for Europe's largest economy, Germany, rose to 47.4 in September, its highest since March. It was still below the 50 line that divides growth from contraction.
The PMIs for Italy and Spain were not bad as expected, providing some relief for the euro, which has been beset by worries about sovereign debt and the banking sector.
An independent audit released on Friday showed Spain's banking sector would need 59.3 billion euros in additional funds to cope with an economic downturn, but Spain said only 40 billion euros would come from European aid while the rest could be raised by the banks themselves.
"Basically, the result of Spain's bank audit was not bad news in itself, but worries remain about that country and about Greece as well," said Kimihiko Tomita, head of foreign exchange at State Street Global Markets in Tokyo.
Inspectors from the "troika" of international lenders - the International Monetary Fund, the European Central Bank and European Commission - are scheduled to return to Athens this week to assess Greece's progress on reforms.
Two German magazines reported on Saturday that Greece would receive its next tranche of international aid, despite budget shortfalls and slow fiscal progress, because the euro zone wants to prevent a Greek exit.
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