Euro up in thin trade, gain seen short-lived

One hundred Euro banknotes lay on top of various Swiss Franc notes in this picture illustration at a bank in Warsaw, July 18, 2011.

SYDNEY (Reuters) - The euro clung to modest overnight gains in Asia on Friday, having been buoyed by a wave of short covering after an attempt on the downside fizzled out.

Positive U.S. data also helped offset euro zone concerns, giving risk appetite some support. That saw the dollar index .DXY retreat from a one-year peak of 80.854 to 80.410 and the euro bounce off a 15-month low of $1.2856 to $1.2951.

Market focus is now on HSBC's China manufacturing activity report for December due at 0230 GMT. A preliminary purchasing managers' survey released earlier in the month showed China's factory output shrank again in December after new orders fell.

"A further decline in contractionary territory will augment concerns about the slowdown in the global economy. The reaction of the Shanghai Composite will also be important in assessing domestic sentiment," analysts at BNP Paribas said.

Against yen, the euro was at 100.50, off a 10-year low around 100.01 plumbed overnight. Traders said a push to trigger stops below 100 yen failed, forcing some players to cover short positions in thin year-end trade.

The euro looked set to end the year down 3 percent against the greenback, following a 6.6 percent drop in the previous year, dragged by the euro zone debt crisis.

Italy's debt sales this week saw its borrowing costs ease generally, but they remained unsustainably high, especially for a country needing to raise 450 billion euros ($580 billion) through debt issuance in 2012.

Italy, the euro zone's third largest economy, remains at the centre of the debt crisis that began in Greece two years ago and its borrowing needs could overwhelm the bloc's financial defences if it were forced to seek an international bailout.

That worry, coupled with signs that European banks were wary of lending to each other, looked set to keep the euro under pressure in 2012, traders said.

In contrast, the U.S. outlook continued to improve. Extending a string of positive data, a regional factory survey showed the economy gained momentum as the year ended, while a separate report added to signs of a tentative recovery in the housing market.

That helped U.S. stocks .SPX end 1.1 percent higher on Thursday and gave commodity currencies a bit of a lift. The Australian dollar climbed to $1.0135 from an overnight low of $1.0044.

But BNP Paribas analysts warned the Aussie could come under pressure if Chinese data surprised on the downside.

"A break of 1.0100 support could trigger further losses in AUDUSD. Further pressure on AUDUSD could result at the start of the calendar new year with the release of the official Chinese PMI data (on January 1). We expect a decline to 48.4 versus consensus of 49.1," they said in a client note.

(Reporting by Ian Chua)