LONDON - The Japanese yen rallied to a three-week high on Tuesday as disappointing data on Chinese manufacturing undermined risk appetite, with investors waiting for European data to see if that will push currencies out of recent trading ranges.
Forecasts are for a 0.3 percent rise in euro zone gross domestic product from the quarter before. That would be a bigger increase than the previous quarter and may be taken as a sign of stabilization.
Even such marginal growth could squeeze speculators who have been amassing large short positions in the euro, worth a net $14.8 billion in the week to April 23.
"Any signs of consolidation in the German CPI data and the eurozone GDP figures may lead to some unwinding of the extended short positions in the euro, particularly on the crosses," said Valentin Marinov, head of G10 FX research at Credit Agricole in London.
But early trends in the currency markets were cautious after China's official purchasing management index dipped to 50.1 April. Forecasts had been for no change from March's 50.5 or an increase.
Some of the favored currencies in a low-volatility environment such as the Australian dollar and the Aussie/Swiss franc fell 0.2 to 0.3 percent.
Trading was thin with Japan on holiday, and set to get thinner on Wednesday when China and much of Europe will be off.
Against a basket of currencies, the dollar was flat at 97.839. On a monthly basis, it was up 0.6 percent and on track for a third consecutive month of gains.
The Federal Reserve's two-day policy meeting, which ends on Wednesday, remains a hurdle for the dollar. No change in policy is expected, but the market wants to hear how Chairman Jerome Powell resolves the divergence between solid economic growth and slowing inflation.
(Reporting by Saikat Chatterjee; Additional reporting by Wayne Cole; Editing by) ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))
