FOREX-Dollar near 7-week low, China factory data lifts Aussie
* Dollar fragile after 5 straight losing sessions
* Traders preoccupied with uncertainty on Fed tapering
* Signs of improvement in Europe, China undermines dollar
* Aussie gains on China output, weathers RBA statement
TOKYO, Aug 9 (Reuters) - The dollar licked its wounds on Friday, holding near a seven-week low against a basket of currencies, following losses over five straight days while the Australian dollar advanced on upbeat factory data from China.
Traders say the dollar's precipitous fall reflected uncertainty over how soon the Federal Reserve will start reducing its stimulus, as well as signs of improvement in other economies, such as China and Europe.
"Essentially, the dollar has been falling after the payrolls numbers were weaker than expected. But I think the dollar is just testing the lower end of its range rather than entering a fresh downtrend. Sentiment may change if upcoming U.S. data, such as retail sales, shows strength," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
The dollar index against a basket of six major currencies hit a low of 80.868 on Thursday and last stood at 81.04 , little changed on the day but within sight of its June low of 80.498.
The dollar index has few reasons to fall below the June low, many analysts say, as the Fed is expected to start reducing stimulus sooner or later.
Fed policymakers have suggested in recent weeks that it could start to scale back its monthly bond buying as soon as September, but this will depend on further improvement in the job market.
Thursday's weekly jobless claims data suggested the U.S. job market remains on the mend.
Yet, that alone was not enough to convince investors that the Fed will trim its bond buying of $85 billion a month next month after data last Friday showed U.S. employers slowed their pace of hiring in July.
BOOST FROM CHINA
The euro hit a seven-week high of $1.3401 on Thursday and last stood just below that level at $1.3380, not even far from its June peak of $1.34175. The currency drew strength from an above-forecast German trade surplus and Wednesday's much stronger-than-expected German factory data.
The Australian dollar extended its recovery after China's industrial output beat market expectations, a day after the country's solid import figures boosted commodity currencies and risk assets.
"Chinese data seems to be holding up pretty well. Coupled with import numbers yesterday, it seems you don't have to worry about a sharp fall in Chinese output," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
The currency ticked up even after the country's central bank trimmed its economic growth outlook and said a further fall in the local currency would help the economy rebalance away from mining investment.
The Aussie rose 0.15 percent to $0.9115, extending its 1.2 percent gain the previous day following stronger-than-expected Chinese data.
If current gains are maintained, the Aussie is on course to log its biggest weekly rise in more than a year and a half. But it is presently the worst performer among major currencies so far this year with a year-to-date loss of 12 percent.
Against the yen, the U.S. dollar slipped 0.1 percent to 96.47 yen, giving up some of overnight gains and edging towards a seven-week low of 95.81 yen hit on Thursday.
"A fall in risk/reversal spreads in the options market implies there is strong demand for dollar puts by short-term players. In terms of technicals, the dollar/yen has not recovered even to its five-day average," Osamu Takashima, chief FX strategist at Citigroup Securities in Tokyo, said in report.
The five-day average stood at 97.13 at the moment.
A potential target in the near term would be a 76.4 percent retracement of its rally from June to early July at 95.59, he added.