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* HSBC flash PMI shows Chinese factory activity steadying
* Euro steadies after German PMI survey
* Yen off 3-1/2-month highs versus both dollar and euro
By Anirban Nag
LONDON, May 22 (Reuters) - Robust expansion in Germany and the euro zone’s private sector helped the euro recover from recent lows on Thursday, although growing expectations that the ECB will ease monetary policy next week kept gains muted.
Earlier, better-than-expected Chinese data saw the safe-haven yen lose ground and helped the Australian dollar recover some of this week’s losses.
China’s factory sector, while still contracting slightly, turned in its best performance this year in May, holding out the hope of more revenues for an Australian economy which provides much of its raw materials as well as offering a boost to the broader global economic picture.
As a result the yen, which is preferred during times of economic uncertainty, broadly underperformed.
The euro was 0.2 percent higher against the yen at 138.96 yen, recovering from a 3-1/2 month low of 138.15 yen hit on Thursday. Against the dollar, the euro was steady at $1.3680, rebounding from a three-month low of $1.36345 struck a day earlier.
The euro had fallen early in the London session after data showed French business activity unexpectedly shrinking in May, but quickly recovered ground after the German purchasing managers’ index was released.
All of which left the euro zone composite PMI for May at 53.9, bang in line with expectations, and slightly below April’s reading of 54. Still, the data pointed to quarterly growth of around 0.3-0.4 percent, some economists said.
“True, it points to some growth, but it’s not really enough,” said Peter Kinsella, currency strategist at Commerzbank. “There are deflationary forces in play and we expect the European Central Bank to cut rates next month, perhaps negative rates too. So to us, the euro remains a sell at $1.3700.”
The dollar kept a firm bid tone against the Swiss franc with talk in the market swirling on Wednesday of a big order for dollars just as Credit Suisse announced it will pay $2.5 billion in penalties for helping Americans evade taxes.
The dollar traded at 0.8930 francs on Thursday, just off three-month highs of 0.89655 francs struck on Wednesday.
“There was a big order that went through yesterday and, just generally, if you believe the dollar is going to gain then dollar/franc is a good way to go,” said one London-based dealer.
The dollar also recovered from a 3-1/2-month low against the yen, rising 0.2 percent to 101.55 yen, partly helped by the Chinese factory data and a pick up in U.S. yields.
U.S. 10-year Treasury yields, which have a good correlation with the dollar/yen pair, rose to 2.54 percent, compared with a trough of 2.473 percent set last week which was the lowest since late October.
Speculation about the possibility of any imminent ramp-up in the Bank of Japan’s monetary stimulus has receded, but there are also signs that Japanese investors are building up their investments in Japanese stocks and foreign bonds. (Additional reporting by Patrick Graham; Editing by Ruth Pitchford)