The Australian dollar slipped against major currencies on Tuesday, falling from a 26-1/2-month high against the euro, as signs that China is stepping up quantitative tightening sparked a knee-jerk sell-off. High yielding currencies fell after a Chinese bill auction suggested to traders that the central bank's quantitative tightening was still in tact and it was moving faster than expected to tighten its grip on liquidity.

But some analysts said investors were unduly worried. They argued the measures are only gentle restraints on China's economy to prevent it from overheating in the long run. China is Australia's top trading partner and the biggest buyer of Australia's mainstay commodity exports. Any slowdown in Chinese growth is seen hurting Australian assets.

Investors were unnerved by China's policy moves and traders said Japanese investors were among the most dominant sellers of the Aussie. The euro, which has been dragged down this week on worries over Greece's debt pile, firmed to A$1.5574, after falling to A$1.5495 earlier in the day, its lowest since October 2007.

RBC's Trinh said many stop-losses are lined up around A$1.5495. If that is breached, the Aussie may rally further, forcing the euro to snap major support in A$1.5470-A$1.5490 range, lows from 2005 and 2007. Against the US dollar, the Aussie slipped to $0.9236, from an intra-day high of $0.9274. It also dropped on the yen to 83.60, from the day's high of 84.15.

Copyright Reuters, 2010