TOKYO/SYDNEY (Reuters) - The euro steadied in Asian trade on Friday, a day after notching its biggest monthly fall against the dollar in nine months, as investors took slightly disappointing Chinese data in stride.
The single currency's upside remained capped as political uncertainty in Italy and impending U.S. government spending cuts sapped some investors' appetite for risk.
China's February official purchasing managers' index (PMI) showed manufacturing activity at its slowest pace in four months at 50.1, slightly below a 50.2 Reuters poll consensus and the 50.4 posted in January.
HSBC's final PMI for the same month showed activity fell to 50.4 after seasonal adjustments from January's two-year high of 52.3, in line with a flash reading in late February.
"The Chinese data wasn't as good as some had expected, and while usually risk-off sentiment doesn't help the euro, it didn't prove to be a major factor in Asia," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.
"Sentiment toward the euro is calmer but the situation is still unclear in Italy, and investors are waiting for fresh developments there," she added.
The euro was at $1.3073, up about 0.1 percent and holding above a seven-week low of $1.3018 hit earlier in the week. A break of that level would bring into focus its 2013 low of $1.2998.
The euro lost about 4 percent against its U.S. peer in February, its biggest monthly slide in nine months.
Against the yen, the euro rose 0.2 percent to 121.12 yen, after rising as high as 121.84 earlier in the session.
The yen, usually bought in times of heightened market stress, continued to underperform a day after Prime Minister Shinzo Abe nominated an advocate of aggressive policy action to head the Bank of Japan.
Government data on Friday underscored the challenge faced by the BOJ to vanquish deflation and achieve its new target of 2 percent inflation, with core consumer prices skidding for a third straight month in annual terms in January.
The dollar bought 92.64 yen, up about 0.1 percent and extending a recovery from this week's fall to 90.85 and heading back towards a 33-month peak of 94.77 set on Monday.
Traders said benign inflation data on Thursday gave the European Central Bank room to cut interest rates, which further diminished the allure of the euro.
"Our economists have revised their view and now expect a 25 basis point cut in the ECB's refi rate either next week or in April," said Vassili Serebriakov, a strategist at BNP Paribas.
Serebriakov said this suggested downside risks for the euro and the bank's trade recommendation for a long position in euro/dollar, established at $1.3180, with a stop-loss order placed at $1.2980.
"However, we would argue that a refi rate cut would probably be least damaging for the euro, as compared to other potential forms of easing such as cutting the deposit rate to negative."
The common currency had been given a slight reprieve in the middle of this week when a relatively smooth Italian government bond auction helped offset unease about an inconclusive election result.
But comfort from Italy's successful bond sale was fast fading on concerns that sweeping budget cuts worth $85 billion across U.S. federal government agencies will hit growth in the world's biggest economy.
The International Monetary Fund has said it will likely cut its U.S. and global growth forecasts if those automatic spending cuts take effect on Friday, and warned that the U.S.'s biggest trading partners would be hardest hit.
(Editing by John Mair and Sanjeev Miglani)
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