| NEW YORK
NEW YORK The euro gained against the U.S. dollar on Tuesday on news of a surge in factory output in Britain and Germany, extending a string of recent upbeat data that perhaps points to an early end to the euro zone's 18-month recession.
While the single currency was buoyed by strong growth at factories in Germany, Europe's largest economy, and in Britain, the euro zone's biggest trade partner, most analysts believe the region significantly lags the kind of recovery underway in the United States.
The euro climbed as high as $1.3306 and last traded at $1.3292, up 0.3 percent on the day.
Nevertheless, the Australian dollar saw the biggest price action, gaining after the Reserve Bank of Australia cut interest rates as expected and gave no clear indication it would ease policy further, disappointing some who had positioned for it.
The RBA lowered its cash rate by a quarter point to a record low of 2.5 percent, a cut which was fully factored in. Some had geared up for a 50 basis point cut and some form of forward guidance or pledge to keep rates low, analysts said.
A squeeze in short positions saw the Australian dollar rise 0.7 percent to $0.9006, pulling away from a three-year low of $0.8848 struck on Monday. It has risen for two days and was on track for its best daily performance in two weeks.
While the Aussie last traded at 0.8962, up 0.4 percent on the day, some view the Aussie's gains as temporary.
"The bounce in the Aussie is unlikely to last. The RBA has said it expects a further decline in the currency," said Neil Mellor, currency strategist at Bank of New York Mellon. "I think a move above 90 U.S. cents would be sold into."
The Aussie is likely to be pressured in the medium term by slowing growth in China as well as a strengthening U.S. dollar, Valentin Marinov, G10 currency strategist at Citi told the Global Markets Forum, a Reuters online community.
In the very near term though, he said, the Aussie could squeeze a bit higher. That was primarily because plenty of investors and speculators had built large bets against the currency and needed to book profits, analysts said.
Meanwhile, the dollar fell 0.2 percent to 98.14 yen on selling by U.S. funds with stop-loss sell orders triggered on its drop below 98 yen.
The U.S. currency has fallen for three straight sessions after below-forecast jobs data on Friday prompted some analysts to push back expectations of when the Federal Reserve would begin slowing its bond-buying stimulus.
The dollar briefly pared losses versus the yen and euro after data showed the U.S. trade deficit narrowed sharply in June to its lowest level in more than 3-1/2 years as imports reversed the prior month's spike, suggesting an upward revision to second-quarter growth.
"Unless Bernanke gives a clear signal when the Fed is likely to move, we think the dollar index and euro/dollar will trade in a range," BNY's Mellor added. The dollar index .DXY was down 0.2 percent on the day at 81.742.
An options trader at a large European bank said there was still demand for yen calls - bets the yen will rise and the dollar will fall - but the premium was gradually declining, suggesting a sharp rise in the yen was less likely.
(Additional reporting by Anirban Nag in London; Editing by Chris Reese)