The Australian dollar took heart from steadier Chinese equities and improved consumer sentiment to stage a half-hearted recovery after touching two-week lows on Tuesday.
In early afternoon trade, the Aussie was fetching US72.11¢, compared with US72.21¢ at the same time on Monday.
The currency had slid as much as 2 per cent, to US71.55¢, in overnight trade on Monday, before recovering slightly to US71.88¢ during the morning session ahead of the closely-watched start to Chinese share trading.
In the event, the opening proved benign compared with Monday's 7 per cent plunge on the CSI 300 and Shanghai Composite index, which triggered a global sell-off in riskier assets. The Aussie also got a small boost from the latest ANZ/Roy Morgan weekly consumer confidence survey, which climbed 0.8 per cent.
A weak reading in the Caixin/Markit China Manufacturing Purchasing Managers' Index (PMI) triggered the decline on Monday. The report showed China's factory activity contracted for the 10th straight month in December, and at a sharper pace than in November.
The data sparked a global sell-off in equities and commodity currencies, as well as a flight to safer haven assets such as the yen and gold.
"We saw the Aussie pushed down after investors flocked to the US dollar as concerns grew about China and the year ahead for them," said Stuart McPhee, senior technical analyst at OANDA Australia and Asia Pacific.
However, Mr McPhee said the US72¢ area was a support level for the Aussie dollar.
"This level has been significant for the last several months and continues to play a role," he said.
The Aussie could have come under more selling pressure if Chinese sharemarkets had extended their slide on the 12.30pm, AEDT opening.
"But it is important to remember that if Chinese stocks continue to fall, the Chinese government will not hesitate to step in to turn the tide around," said BK Asset Management managing director of forex strategy Kathy Lien.
"There's no question that the People's Bank of China will increase stimulus this year especially given recent developments."
Further adding to investor jitters were the renewed tensions in the Middle East. At the weekend, Saudi Arabia cut ties with Iran after Iranian protesters attacked its embassy in Tehran, angered by the Sunni Muslim kingdom's execution of a leading Shiite cleric.
