The euro edged higher on Tuesday but could come under pressure if euro zone manufacturing data point to more downside risk in a market already fretting about a global recession.
The Australian dollar rose around 30 pips or so after a gauge of Chinese manufacturing was not as weak as some had feared, and was last up 0.3 percent on the day at $1.0429 [AUD= 1.0492 0.0095 (+0.91%) ].
HSBC's China flash Purchasing Managers' Index showed the Chinese factory sector may have slowed slightly in August for a second straight month. The reading, however, still edged up to 49.8 in August, better than July's final reading of 49.3.
The market's focus now turns to flash PMI data for Germany, France and the euro zone due later in the day for clues on whether the region's deepening debt crisis is weighing on broader economic growth.
"The current stabilization in risk is conditional on European PMIs not disappointing sharply. Weaker growth in Germany would lead the market to think that help for peripheral Europe will be harder to come back," warned Sebastien Galy, analyst at Societe Generale.
The euro rose 0.1 percent to $1.4378 [EUR= 1.4437 0.0082 (+0.57%) ], with support in the $1.4340-45 area, where traders said there are some buy orders lurking.
Lower down, there is talk of good bids at $1.4260 to $1.4270, right around support at last Friday's intraday low near $1.4259, while selling interest starts from $1.4420 with more selling interest at $1.4450.
Not helping the common currency is the ongoing public squabbling between the bloc's 17 member states on how to tackle the region's debt problems.
Germany's Angela Merkel is facing growing domestic criticism of her euro zone policies, with the Bundesbank slamming an anti-crisis package she agreed to in Brussels last month and a senior ally warning he would vote against key parts of it.
Wary of Intervention
The dollar held steady against the yen at 76.79 yen [JPY= 76.71 -0.10 (-0.13%) ].
Market players are wary of any yen-selling intervention by Japanese authorities, in the wake of the dollar's drop to a record low around 75.94 yen late last week.
Since dollar/yen bounced around 3 yen from intraday lows the last time Japan conducted yen-selling intervention on Aug. 4, market players reckon that the dollar may get a similar lift if Japanese authorities were to step in again.
Any dollar bounce in the event of intervention is likely to be met by strong dollar selling interest at levels around 79 yen to 80 yen, market players say.
"We think it's going to be very, very difficult for the MOF to get a real successful intervention. There's just a wall of offers," said Rob Ryan, FX strategist at BNP Paribas in Singapore, referring to Japan's Ministry of Finance, which is in charge of currency intervention.
Although intervention may spur dollar short-covering by trend-following commodity trading advisors, Japanese exporters and retail investors are likely to sell into any dollar bounce, Ryan said, adding that some hedge funds have already positioned themselves for possible intervention.
"We've seen some of the macro players turn around and go long dollar/yen, or take off their shorts because they're effectively waiting for the MOF to come in and to give them better levels to go short again," he said.
"It means first of all, the MOF is not going to get the big short-covering from these accounts if they do intervene, and secondly they're going to run into offers pretty quickly," Ryan said.
Bank of Japan money market data suggests Japan sold roughly 4.5 trillion yen in currency intervention on Aug. 4, its biggest one-day yen-selling intervention ever.
But the yen ended up rising back to levels seen before the intervention a few days later.
