LONDON - The Japanese yen fell to a six-month low on Monday and the Australian and New Zealand dollars rallied after an unexpected rebound in Chinese manufacturing activity raised hopes of a brighter outlook for the world economy.
The euro was steady ahead of a testimony to the European parliament later in the day by the European Central Bank's new president, Christine Lagarde. A tightening British election race knocked the pound lower.
The latest data out of China, the world's second biggest economy, set the tone for currency markets. Chinese factory activity expanded at the quickest pace in almost three years in November, a private business survey showed on Monday, following upbeat official data over the weekend.
The survey also showed total new orders and factory production at buoyant levels.
"The fact that not only the Chinese PMI is better than expected but the underlying numbers are also encouraging plays into the narrative of other forward-looking numbers we've seen globally," said Jeremy Stretch, head of G10 FX strategy at CIBC capital markets.
"This gives reason for cautious optimism, even though we wait to see what happens on phase 1 of the trade U.S./China trade talks."
The safe-haven yen fell to 109.73 per dollar, its lowest since May and was last down a fifth of a percent at 109.63.
Riskier currencies also rallied after the Chinese data, with the Australian dollar up a third of a percent at $0.6779
New Zealand's currency, the Kiwi dollar, gained to a one-month high at $0.6460. Analysts said the currency was also buoyed by talk of fiscal stimulus to boost the New Zealand economy.
Even a report by the news website Axios saying that tensions in Hong Kong had stalled Sino-U.S. trade talk, was not enough to hurt sentiment.
"S&P futures are up, there's a risk-on mood," said Jason Wong, senior market strategist at BNZ in Wellington.
The next focus will be on manufacturing surveys in Europe and the United States later in the day.
The euro was steady at $1.1017 before Lagarde's testimony to the European parliament later in the day.
Lagarde took over the helm of the ECB last month and investors want a sense of the direction central bank policy will take under its new president.
Elsewhere, sterling was down a fifth of a percentage point at $1.2919 as polls pointed to a narrowing lead for the governing Conservative Party before the UK's Dec. 12 election.
(Reporting by Dhara Ranasinghe; additional reporting by Tom Westbrook in Singapore; editing by Larry King) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))