TOKYO: The euro steadied against the yen and the US dollar in Asia on Tuesday, as investors' risk appetite perked up after data showed signs of improvement in China's manufacturing output. 

China's manufacturing output in July grew at its fastest pace in nine months which offered some relief amid mounting worries that Spain, the euro zone's fourth-largest economy, may need to seek a bailout.

HSBC's Flash China manufacturing purchasing managers index rose to 49.5 in July, its highest level since February, driven by a jump in the output sub-index to its best showing since October 2011.

However, the euro's gains were limited in the wake of Moody's Investors Service's move to cut its outlook on Germany to negative. Moody's also turned negative on the Netherlands and Luxembourg warning that Europe's top-rated nations may have to increase support for indebted states such as Spain and Italy.

“More bad news has been emerging from Europe, but it's not surprising bad news, just new developments on the same problems,” said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.

“The euro still faces pressure, but it's not a steady path downward,” he said.

The euro was changing hands at $1.2125 after rising to a session high of $1.2138 right after the China figures. But it remained not far from Monday's trough of $1.2067 on the EBS trading platform, which was its lowest level since June 2010.

Support is seen at $1.2024, the 200-month moving average, ahead of an options barrier at $1.2050. After the psychological level of $1.2000, the next target is the 2010 low around $1.1876.

Against the yen, the euro fetched 94.88 yen, down from a session high of 95.02 yen but holding above Monday's low of 94.23 yen, its lowest in nearly a dozen years.

Even the relatively positive China data could prove to be a negative for the euro, some traders said, if it inspires investors to continue to use it to fund carry trades, in which investors effectively borrow low-yielding currencies to invest in higher-yielding currencies and assets.

Such trades continued to push it lower against the

Australian dollar, which benefitted from the brighter manufacturing outlook of its key trading partner.

The Aussie was last at $1.0296, up 0.4 per cent, and it was at A$1.1770 against the euro, which slipped 0.3 per cent.

The dollar eased slightly against a basket of major currencies after hitting a two-year high on Monday. The dollar index was at 83.695, down from the high of 83.999.

On the yen, the dollar bought 78.25, above a seven-week low of 77.94 yen on Monday.

This week started off badly for risk assets as markets fear Spain will be next to need a full bailout, after media reports suggested half a dozen regional authorities were ready to follow Valencia in seeking financial support from Madrid.

Spanish bond yields jumped to euro-era highs on Monday, while Italian yields also rose.

Greece will share centre-stage with Spain on Tuesday as inspectors from the international lenders return to Athens to re-launch its stalled economic plan and decide whether to keep the nation hooked up to a 130-billion-euro lifeline.