The euro found some reprieve today from a plunge since the start of the week and commodity currencies rose after upbeat Chinese data comforted market players gripped by fears that the euro zone debt crisis could spiral out of control.

The euro has managed to stay more than 1 per cent above a four-month low against the dollar and kept some distance against the Swiss franc in Asia, as falls in Italian and Spanish bond yields after their surge to 14-year highs yesterday have put the brakes on selling of the single currency.

The Japanese yen, which has benefited from the euro's woes, hit a four-month peak against the dollar and many other currencies in thin, early Asian trade, but it then stepped back from highs in line with an easing in overall risk aversion trade.

The US dollar were not helped by the minutes of the Federal Reserve's last meeting that revealed that some policymakers believed further easing could be needed if the recovery remains too sluggish.

"I guess we've already seen selling climax for the moment. But the market is still a bit shocked, so trade is thin and volatile," said a trader at a Japanese brokerage.

"We still need to keep an eye on Italy and Spain. But in the very near-term, a lot of bad positions seem to have already been unwound," the trader said.

The euro stabilised around $1.3990, after yesterday’s wild swings that took it to a four-month low around $1.3838, with the news that Moody's cut Ireland's credit rating to junk status adding salt to its wounds.

In Asian trade, the euro got some help after data showed solid expansion in the Chinese economy and industrial output, wrong-footing those who had expected a sharper slowdown.

Immediate support is seen around $1.3907, the 200-day moving average, then the overnight trough, followed by the March low of $1.3740/50.

Still, the euro is poised to remain vulnerable to worries about the debt crisis with focus shifting to the European Union leaders' emergency summit expected on Friday after finance ministers acknowledged for the first time that some form of Greek default may be needed to cut Athens' debt and stop contagion spreading to Italy and Spain.

The European Banking Authority will also publish stress test results for 91 of the region's top lenders on Friday, keeping euro bulls in check.

"The euro is going to remain under downward pressure until we get some clarity," said Richard Grace, chief currency strategist at Commonwealth Bank in Sydney, adding it could fall to $1.3659 in coming days.

Against the safe-haven Swiss franc, the common currency stood at 1.1640 franc, having plumbed a record low of 1.1555 yesterday.

The dollar briefly plunged to 78.48 yen as stop-loss orders, mainly from Japanese retail traders, were triggered in thin volumes a few hours before Asian trading became active.

Just before that happened, Japanese margin traders' net foreign currency buying was at a record high, according to data from major margin trading exchange TFX.

The dollar later bounced back to around 79.54 yen, up 0.4 per cent on the day, helped by selling from Japanese investors.

Still, the greenback has broken below support around 79.50 yen for the first time since mid-March, when Japanese officials, along with other central banks, had to intervene to curb the yen.

"It was a pretty sharp spike down and I think the Bank of Japan will be watching to see what happens next," Commonwealth Bank's Grace said.

But for now few Tokyo traders see imminent intervention for several reasons. For one, the currency's moves can hardly be described as volatile even counting on its rise this week, having stuck to a narrow trading band in the past few months.

Yen selling could lift the cost of rebuilding after the earthquake as Japan has been running a rare trade deficit as it needs to import more raw materials while its exports plunge, traders also said.

In addition, Japanese share prices are holding out well above its post-quake low, thus Japanese policy makers are likely to be less alarmed than they were in March.

Traders say the dollar is now likely to stay below 80 yen, which is seen as strong resistance.

Commodity currencies advanced after the Chinese data, with the Australian dollar gaining 0.3 per cent to $1.0630. Commodity currencies have seen much milder moves than the euro, even though they were not completely spared the overnight drama, in which investors dumped risky assets.

The US dollar has problems of its own, not least the political impasse on lifting the government's debt ceiling, which could result in default if not resolved - an issue that has escaped the level of market scrutiny on euro zone debt.

"Right now the market is looking at a fire that is flaring up nearby rather than at smoke in the distance," said Sumino Kamei, senior currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

Some players think the market's focus could shift later this month ahead of August 2nd, when the US will hit the debt ceiling and run out of funding options unless congress agrees to raise the ceiling.

Dollar bulls are also wary ahead of Fed chairman Ben Bernanke's semi-annual testimony on the economy and monetary policy before the House Financial Services Committee starting at 1400 GMT.

Following last Friday's dismal jobs report, Mr Bernanke could err on the side of caution, adding more pressure to the dollar.

Reuters