Dollar steadies, Aussie dented by China survey

By Patrick Graham

LONDON (Reuters) - Slightly higher U.S. Treasury yields and solidifying expectations of a rise in interest rates this month helped the dollar recover some ground on Thursday after its weakest run in more than a year.

The dollar index has had its poorest fortnight since March of last year due to an improvement in euro zone economic data at a time when U.S. equivalents have looked shaky and belief is evaporating in a boost from public spending to growth.

Traders said the wait for jobs numbers on Friday may provide the dollar with some respite, and the greenback gained just over 0.2 percent against the basket of currencies used to measure its broader strength in morning trade in Europe.

But those gains were more pronounced against the yen, the Australian dollar and a weakened British pound, and few analysts are willing currently to bet against the euro.

"We saw some profit-taking on the euro this week because of worries over Italy and Greece and some dovish comments from (European Central Bank chief) Mario Draghi," said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America Merrill Lynch (NYSE:BAC) in London.

"It is interesting how fast it rebounded. People are clearly trying to buy the dips (in the euro). But for now we may just see a wait for the non-farm payrolls numbers tomorrow."

By 1115 GMT, the dollar was just under 0.2 percent stronger at $1.1225 , compared to last week's 6-1/2 month low of $1.1268. It gained 0.4 percent to 111.21 yen and $1.2845 per pound respectively.

The big mover in Asian time was the Australian dollar, hit by a private survey showing Chinese manufacturing activity unexpectedly shrank in May.

The Caixin report, which tends to focus on smaller firms, contrasted sharply with official readings on Wednesday that had shown steady manufacturing growth in China, and the Aussie slid as much as half a percent in response.

It stood 0.4 percent lower at $0.7396 by midday in London. AUD=D3

China's yuan, by contrast, remained firm even after the weak factory activity reading, officially guided onshore rates touching their strongest in nearly seven months.

Sterling, on a rollercoaster ride this week as polls send conflicting signals about next week's national election, was also 0.14 percent weaker at 87.29 pence per euro. (EURGBP=D3)

Another poll overnight showed Prime Minister Theresa May's lead at just 3 points and her overall majority now in question.. Others say she is still 10 points or more in front and will increase her majority.

Betting markets still put the probability of a win for May's Conservatives at more than 90 percent and the pound is trading almost a cent above the past week's lows against the dollar. But in trade-weighted terms, it hit an 8-week low on Wednesday.

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"You get the feeling that the pound just wants to go higher but keeps on getting knocked back down again," analysts from Investec said in a morning note.

"Be it a poll showing Labour’s deficit eroding or data out this morning from the Nationwide showing that the UK house prices have slipped for the third month in a row. (Against the dollar) the pound just seems to be hitting a wall."