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AAP

2013-02-25

The Australian dollar has closed lower in response to disappointing Chinese manufacturing data.

At 1700 AEDT on Monday, the Australian dollar was trading at 102.79 US cents, down from Friday's close of 103.13 US cents.

The Australian dollar touched its intraday low of 102.64 US cents after data showed manufacturing activity in China hit a four-month low in February.

The HSBC preliminary purchasing managers' index (PMI) fell 1.9 index points in February to 50.4 index points.

Although it was the fourth consecutive month the index had been above the key 50 level that shows an expansion in manufacturing activity, the result was below what some market players had expected.

Easy Forex senior currency dealer Francisco Solar said the report took the market by surprise.

"It just gave a little bit of a check to the market," Mr Solar said.

After the sharp decline, the Australian dollar in afternoon trade pared back some of those losses as some market players took the view the PMI may be a one-off."

And Moody's decision to strip the United Kingdom of its AAA credit rating left Australia as one of a handful of economies left still holding the coveted top-notch rating.

"That makes the Aussie all that more attractive to overseas investors, which is why buying on the dip seems to be the norm when the Aussie gets sold off like we saw today," Mr Solar said.

"It is very hard to push the Aussie lower."

At 1700 AEDT, the Australian dollar was trading at 96.81 Japanese yen, up from Friday's local close of 95.19 Japanese yen.

The unit was at 77.87 euro cents, down from 78.08 euro cents previously.

Meanwhile, the Australian bond market closed firmer.

The March 10-year bond futures contract ended the local session at 96.525 (implying a yield of 3.475 per cent), up from Friday's close of 96.485 (3.515 per cent).

The March three-year bond futures contract was at 97.140 (2.860 per cent), up from 97.100 (2.900 per cent) previously.

Bond futures contract prices opened higher, as investors took their cues from the UK credit downgrade during weekend offshore trading.

However, futures contract prices stayed within a tight range on a day with little to offer for direction.

Westpac senior market strategist Damien McColough said the next big event for bonds was the Australian Bureau of Statistics' capital expenditure figures (capex) for the December quarter due out on Thursday.

Mr McColough said the capex data would have a large bearing on the prospects of an interest rate cut by the Reserve Bank of Australia (RBA) at its next monthly board meeting on March 5.

"It all depends on the capex data for real domestic price impetus this week," Mr McColough said.