SYDNEY The euro came under pressure in Asia on Monday as the prospect of a recession in Germany and renewed concerns about Italy weighed on sentiment, while strong Chinese data helped support the Australian dollar.
The euro fell about 0.3 percent to $1.2880 in thin early trade, slipping to near a two-week trough of $1.2876 set Friday. Against the yen, the single currency also shed about 0.3 percent to around 106.15.
Investors sold the euro after Germany's central bank on Friday warned the euro zone's biggest economy could soon enter recession and Italian Prime Minister Mario Monti on Saturday said he intended to resign early, creating uncertainty over who will succeed him.
Comments from a European Central Bank policymaker on Friday that an interest rate cut was possible next year if the euro zone economy does not pick up also weighed on the common currency.
"We're seeing a building of interest rate-cut expectations really start to take off," said Ilya Spivak, currency strategist at DailyFX in Sydney.
The euro's losses helped the dollar index edge up 0.3 percent to 80.565. The dollar was a touch firmer against the yen at 82.57.
Traders said the upside for the dollar may be limited in the lead-up to this week's Federal Reserve policy meeting, with the market almost certain the U.S. central bank will replace its expiring Operation Twist programme with a fresh round of Treasury bond purchases.
Many economists think the Fed will announce on Wednesday monthly bond purchases of $45 billion, signalling it will continue to pump money into the U.S. economy during 2013 in a bid to bring down unemployment.
Jobs data on Friday showed the U.S. unemployment rate fell to a near four-year low of 7.7 percent as companies kept up their slow but steady hiring pace in November.
"Despite a drop in the unemployment rate, we expect the Fed to convert the expiring Operation Twist programme into an outright purchase programme, with a purchase distribution similar to the current program," Barclays Capital analysts wrote in a note.
The market remains worried the U.S. government may fail to prevent automatic tax hikes and spending cuts set to take hold next year, which analysts have warned could see the U.S. economy swing back into a recession.
President Barack Obama met with Republican Speaker of the House of Representatives John Boehner on Sunday to discuss ways to avoid the 'fiscal cliff', but a resolution remained elusive.
The Australian dollar held its ground against the greenback after weekend data showed China's factory output and retail sales jumped to eight-month highs in November, underpinning hopes the world's second-biggest economy is regaining momentum.
China is Australia's single biggest export market and developments there tend to affect demand for the Aussie dollar.
The Aussie stood at $1.0483, steady from late New York levels, and near an 11-week peak of $1.0515 set last week. It rose against the euro, which plumbed a three-week low around A$1.2280.
Markets will also be keeping an eye on China's trade data on Monday for further signs the economy is picking up steam.
(Reporting by Ian Chua; Editing by John Mair)