Some reassuring data from Germany eased pressure on the euro on Thursday after speculation of an earlier rate rise from the Federal Reserve had pushed the dollar to an 11-month high.
Share markets also got a lift from the PMI report, which showed the German private sector grew for a 16th month running in August. Stocks had started the day looking flat after a disappointing survey on Chinese manufacturing overnight.
The German data suggested Europe's largest economy could rebound in the third quarter after its surprise contraction in the second. The optimism was tempered by further signs of stagnation in neighbour France.
Europe's pan-regional FTSEurofirst 300 share index .FTEU3 gained 0.45 percent, the euro hit its high for the day and bond yields in the region rose as the data dovetailed with firming expectations the U.S. would raise rates in the next year.
"Even though the direction (of German PMI data) was lower, the picture is still one of moderate recovery," said ABN Amro economist Nick Kounis.
"The market was positioned for something a bit weaker. We had the fall in Q2 GDP, the sharp drop in the ZEW survey and bond markets are starting to price in QE (ECB stimulus) and deflation, so that tells a story."
A subsequent composite of PMI data from across the euro zone showed private business growth slowed more than expected this month, despite widespread price cutting. Markets focussed on the positive news from Germany, though.
The euro rose as high as $1.3277, having slid to an 11 1/2-month low of $1.3243 overnight after investors detected a hawkish turn in policy discussions at the Federal Reserve.
Yields on short-term U.S. debt had leapt by the most since March. Fed policymakers had noted both faster economic growth and a decline in unemployment, minutes from their last meeting showed, though they remained wary about labour market slack.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, steadied in Europe at 82.250, .DXY after breaking higher to 82.332 overnight. The dollar also climbed to a four-month peak against the yen. JPY=
"Our takeaway is that the median FOMC participant has been surprised by how quickly the unemployment rate has come down and is also less convinced there is as much slack in the labour market as previously believed," said Michelle Girard, chief economist at RBS.
"So the hawks are getting restless and the centrists seem to be less dug-in on some of their previously held views."
DELICATE CHINA
Futures markets ESc1 pointed to a 0.2 percent gain for Wall Street when trading starts.
Asia markets stalled after the HSBC/Markit Flash China Manufacturing Purchasing Managers' Index (PMI) fell to 50.3 in August from July's 18-month high of 51.7, missing a Reuters forecast of 51.5.
Investors sold the Australian dollar AUD=D4, often used as a liquid proxy for bets on China. The CSI300 .CSI300 index of the leading Shanghai and Shenzhen A-share listings shed 0.9 percent.
"The sharp drop in the PMI is perhaps not surprising given last month's disappointing activity and lending data. That said, we are not expecting a rapid deterioration in economic momentum," Julian Evans-Pritchard, China economist at Capital Economics, wrote in a note.
Japanese stocks .N225 managed to buck the trend, rising 0.9 percent, aided by the weaker yen and a survey showing manufacturing activity accelerated in August as export and domestic demand increased.
The Markit/JMMA flash Japan PMI jumped to a seasonally adjusted 52.4, up from 50.5 in July and the highest reading since March, just before a tax increase hit demand.
WHEN DOVES CRY?
With the cries of the Fed hawks ringing in their ears, investors are turning their attention to the annual gathering of central bankers at Jackson Hole in the United States, which begins later on Thursday.
It will be dominated by rate hike and labour market discussions. Fed chief Janet Yellen speaks on Friday, but a flurry of U.S. data is due on Thursday as well, including weekly unemployment claims, homes sales and surveys from the Philadelphia Fed. ECONG7
In commodity markets, the rise in the dollar knocked gold down to $1,282.33 an ounce XAU=, and further away from last week's peak of $1,319.10.
Oil also ran into renewed selling after a modest bounce on Wednesday. Brent crude for delivery in October LCOc1 was 80 cents lower at $101.43 a barrel and U.S. crude CLc1 lost 60 cents to $92.80, having touched its lowest since January.
The world's top two crude oil benchmarks have fallen by more than $10 a barrel since June on a build-up of supply in the Atlantic Basin and diminishing worries that conflicts in the Middle East would cut into oil production.
"Fighting in Iraq has had only a very limited impact on producing and transporting facilities. At the same time, lagging European demand and the seasonal lull in Asia continue to weigh on sentiment," said Andrey Kryuchenkov, oil strategist at Russian bank VTB Capital in London.
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