SYDNEY The euro and Australian dollar wallowed at one-week lows on Wednesday, having suffered a setback overnight after disappointing earnings from U.S. firms fuelled risk aversion.
Traders said the market was likely to stay cautious in the lead up to HSBC's latest report on China's manufacturing sector due around 0145 GMT. Any downside surprise could further rattle the market. Conversely, signs that China's slowdown has stabilized could see a return of risk appetite.
The euro was at $1.2985, having fallen as low as $1.2952, pulling back from last week's high of $1.3140. Still, it remained well above this month's trough around $1.2804.
"The poor earnings season has contributed to heightened concerns about global growth prospects, while questions remain as to whether Spain will request a bailout," Bricklin Dwyer, an analysts at BNP Paribas wrote in a client note.
Further dampening sentiment, Moody's downgraded the credit rating of five Spanish regions, prompting a selloff in the country's bonds.
Comments from European Central Bank officials about the bank's new bond-buying programme also gave markets little comfort.
ECB member Yves Mersch said the bank will stick to risk management principles when implementing the programme, while Executive Board member Benoit Coeure said the ECB will stop buying bonds of countries that do not meet conditions of the intervention.
The euro's decline saw the dollar index .DXY bounce 0.5 percent to a near two-week high. The safe-haven yen outperformed the greenback, which eased to 79.86, from three-month highs above 80.00.
In any case, Tuesday's development saw investors dump riskier assets, sending U.S. stocks .SPX down 1.4 percent. In the foreign exchange market, commodity currencies like the Australian dollar bore the brunt of the sentiment turn.
The Aussie shed more than 0.5 percent to a low of $1.0230, and last traded at $1.0264. It has retraced about 61.8 percent of its rally from $1.0145 to $1.0412 earlier in the month.
Key for the Aussie dollar is local third-quarter inflation data due at 0030 GMT. Forecasts are for another benign reading on underlying inflation which would underpin expectations for a follow-up interest rate cut next month.
Interbank futures already imply a two-in-three chance of a quarter point cut to the 3.25 percent cash rate at the Reserve Bank of Australia's November 6 policy meeting.
The one notable stand-out was the Canadian dollar, which actually rose broadly after the Bank of Canada surprised markets by leaning towards higher interest rates and issuing a fairly upbeat outlook on growth.
Markets had been primed for milder language after a speech by Governor Mark Carney last week was seen as decidedly more dovish.
The U.S. dollar fell to C$0.9924 from two-month highs of C$0.9976. The Aussie dipped to C$1.0184, retreating from a two-month high of C$1.0286 set on Monday.
(Editing by Wayne Cole)