FOREX-Aussie drops despite benign Chinese data

* Aussie falls as model-based funds weigh on Aussie/yen

* China slowdown in line with market expectations

* Growth worries keep dollar index near two-month lows

* Focus moving back to U.S. data, earnings

By Rika Otsuka

TOKYO, July 15 (Reuters) - The Australian dollar fell on Thursday, as selling by model-based funds weighed on the currency against the yen, while it took in stride data that pointed to a mild slowdown in China, rather than a deeper one as some had feared.

The Australian dollar slid in early Asian trade after the China Securities Journal reported the economy may lose momentum more than expected later this year. [ID:nTOE66E019]

It temporarily pared losses following the release of Chinese official data but soon started to ease again on the selling by model-based funds, traders said.

“The data has attracted much attention but at the end of the day it wasn’t far from market expectations. It showed the Chinese economy is slowing down, but that’s what markets have been looking for,” said Hideaki Inoue, manager of foreign exchange at Mitsubishi Trust and Banking Corp.

The Australian dollar stood at $0.8772 AUD=D4, down 0.7 percent on the day. It hit a two-month high of $0.8871 on Wednesday.

It also dropped 1 percent to 77.28 yen AUDJPY=R.

The euro erased its losses to change hands at $1.2722 EUR=, not far from its two-month high of $1.2778 hit on Wednesday as traders bought back the currency. Long dogged by worries over euro zone debt problems the euro tends to benefit from rising risk appetite.

China’s economic growth slowed to 10.3 percent in the second quarter from 11.9 percent in the first quarter in response to the fading effect of government fiscal and monetary stimulus as well as a high base of comparison a year earlier. [ID:nTOE66D060]

With Chinese data out of the way, the market’s focus is likely to shift back to the strength of the U.S. economy, traders said.

Investors will look to a raft of U.S. data due later in the day, including industrial output, jobless claims and regional business activity, for clues to the health of the world’s biggest economy. [ECI/US]

“U.S. data will be a very important market-moving factor today, especially after the minutes from the Federal Reserve’s last meeting fanned speculation of further policy easing,” said Hideki Hayashi, a global economist at Mizuho Securities.

Fed officials slightly revised down their outlook for economic growth in the second half of the year, while minutes from the central bank’s June 22-23 meeting said the officials would need to consider whether “further policy stimulus might become appropriate if the outlook were to worsen appreciably”. [ID:nWALEIE6D2]

The Commerce Department reported on Wednesday that U.S. retailers’ June sales declined 0.5 percent -- more than twice the 0.2 percent drop forecast by economists polled by Reuters.

That sapped some of the optimism triggered by strong U.S. corporate earnings being released this week, leaving the U.S. dollar near a two-month low on a basket of currencies.

The dollar index .DXY stood at 83.344, down 0.1 percent on the day and not far from a two-month low of 83.205 hit on Wednesday.

The index is holding just above support at around 83.15, a 38.2 percent retracement of its rise from a low of 74.17 in November 2009 to a high of 88.59 on June 8.

Against the yen, the dollar slipped 0.3 percent to 88.13 yen JPY=.

Charts looked increasingly bearish for the dollar after the greenback failed the previous day to rise above 89.23 yen -- a 38.2 percent Fibonacci retracement of the dollar’s fall from its June high of 92.68 yen to a July 1 low of 86.96 yen, traders said.

The Bank of Japan said on Thursday it expected the economy to grow at its fastest pace in a decade in the year to March 2011, but said the euro zone debt crisis could pose a risk to the outlook.

The central bank kept interest rates unchanged at 0.1 percent, as widely expected. [ID:nTOE66E03G]

Sterling was little moved on the day at $1.5266 GBP=D4, staying near a 10-week high of $1.5298 hit the previous day. Better-than-expected British employment data released on Wednesday added to speculation that the Bank of England may have to start considering raising interest rates. [ID:nLDE66D0NP] (Additional reporting by Anirban Nag and FX analyst Krishna Kumar in Sydney and Hideyuki Sano and Masayuki Kitano in Tokyo; Editing by Joseph Radford)