* Euro drops as EZ manufacturing activity slows
* Swissie extends rally as investors test SNB resolve
* Cyclical currencies seen vulnerable to U.S. ISM data (Adds details on Spanish auction, updates prices)
By Anirban Nag
LONDON, Sept 1 (Reuters) - The euro fell against the dollar and the Swiss franc on Thursday, and could extend losses if fresh evidence emerges that manufacturing output in the United States shrank after euro zone data showed the sector contracting, disappointing some investors.
The yen stayed under pressure on dollar buying by Japanese accounts, lifting the U.S. currency to around 77 yen and soothing jitters that another round of intervention by Tokyo authorities may be on the way.
The Swiss franc climbed against the euro and the dollar , extending spectacular gains made on Wednesday with investors testing the resolve of the Swiss National Bank, which has so far kept away from intervening.
The euro was down 0.7 percent at $1.4272, with losses accelerating after it triggered stops on the break of $1.4350 on selling by some quasi-sovereign investors. It fell below its 100-day moving average, which comes in at $1.4364, and the 21-day moving average at $1.4350.
It extended losses after data showed German manufacturing activity grew at its slowest pace in almost two years, while similar business in other major euro zone economies contracted. European shares also traded lower .
Not helping the euro’s cause was sluggish demand at a Spanish bond auction, days after a weak response to an Italian debt auction, and highlighting increased investor wariness about the festering euro zone debt crisis. .
The debt crisis is likely to hurt growth prospects, while the gloomy euro zone manufacturing sector readings add to evidence that the global economy is slowing.
The U.S. ISM manufacturing index is due later in the session and analysts expect a reading of 48.5 in August versus 50.9 in July , indicating contraction.
“There is a risk of a sub-50 reading in the U.S. ISM manufacturing index. If that happens, cyclical and commodity linked currencies will underperform,” said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
“The global economy is clearly going through a marked slow-down in economic activity, and the market is trying to assess whether this will be just a soft patch or whether we are heading towards a recession.”
Growing worries about a recession are likely driving more investors into the relative safety of currencies such as the Swiss franc and the yen.
The euro fell 1.5 percent against the Swiss franc to 1.1407 francs , while the dollar was 0.8 percent lower on the day at 0.7993 francs .
The franc made hefty gains on Wednesday after a top government official said Switzerland would have to live with a strong currency and there was little sign of action from the Swiss central bank. The SNB has flooded the market with francs, cut rates to near zero and intervened in the swap market to bring the franc down from record highs.
Traders said the SNB was reportedly checking rates in the Swiss franc forward market, although it was yet to intervene to drive down forward rates.
“The SNB’s sight deposit target of 200 billion francs has likely been reached by now and, given the silence from the SNB, investors might now try to test the SNB’s resolve,” said Chris Walker, currency strategist at UBS.
The dollar rose as high as 77.25 yen in the Asian session after a British fund, some U.S. accounts and several Tokyo banks followed a major Japanese bank in buying dollars. Traders said the large dollar purchases appeared to be a specific transaction unrelated to fundamentals or particular positions.
The dollar last traded up 0.3 percent at 76.90 yen.
The Aussie pared gains made after Australian retail sales and capital spending data beat market expectations, as the negative impact of a rate cut by the Brazilian central bank played out.
The Aussie was down 0.13 percent at $1.0685, off a one-month peak of $1.0733. The Brazilian rate cut -- the first in two years -- was taken by some market players as a further sign of weakness in the global economy, prompting them to take profits on the recently outperforming New Zealand dollar. The kiwi fell 0.8 percent to $0.8474 . (Editing by Nigel Stephenson)