The Australian dollar softened yesterday after weaker-than-expected Chinese manufacturing data raised concerns over the momentum of recovery in the world's second-largest economy and Australia's biggest trading partner.
The preliminary HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, fell to 50.4 in February, compared with a final reading of 52.3 in January, because of weakness in global demand for Chinese exports as well as Lunar New Year holidays, HSBC said.
A reading above 50 indicates expansion from the previous month, while a reading below 50 indicates contraction.
The number knocked the dollar to an intraday low of $US1.0262 in Asian trading. At 5pm AEDT, the currency was buying $US1.0279, down US0.34c.
"The reaction was probably not surprising given the weakness in the PMI," said HSBC's Australian chief economist, Paul Bloxham.
"In general I think there's a bit of downside risk to the Aussie dollar."
Part of that risk stems from an improvement in the US economy, where investors are looking to a speech by Federal Reserve chairman Ben Bernanke tomorrow for signs that the Fed plans to continue to pump liquidity into the struggling US economy through its bond-buying program.
Investors are also eyeing the outcome of parliamentary elections that began in Italy on Sunday, testing the country's appetite for economic reform after a year of austerity.
In domestic news this week, capital spending data due on Thursday will give an indication of companies' investment intentions for the financial year starting on July 1.
"If that (data) comes out on the soft side, the Reserve Bank is more likely to need to give the non-mining sector more of a boost," Westpac senior foreign exchange strategist Sean Callow said.
