By Peter Nurse 

- The US dollar retreated in Europe Wednesday while the Chinese yuan rose sharply after economic data pointed to a recovery in the second largest economy in the world, sparking risk-on sentiment.

At 02:55 ET (07:55 GMT), the , which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 104.672.

Data released earlier Wednesday showed that China's manufacturing activity expanded at the fastest pace in more than a decade in February, confirming that the economic recovery in China gained momentum over the past month after the country relaxed most of its anti-COVID measures in January.

China's rose 52.6 in February, a climb from January's figure of 50.1. The also gained in February, to 56.3, well above than the prior month's reading of 54.4. 

Strength in both manufacturing and non-manufacturing activity saw China's jump 56.4 in February - its fastest pace in over three years.

fell 0.5% to 6.9010, moving further away from its lowest level this year, while rose 0.8% to 0.6233 and climbed 0.5% to 0.6760, with these antipodean currencies often used as liquid proxies for the yuan.

Elsewhere, rose 0.4% to 1.0614, boosted by the risk-on sentiment ahead of the release of the manufacturing PMIs for the , and later in the day.

Inflation data from the German region of North Rhine-Westphalia, the country's industrial heartland, rose in January, an .

This, coupled with hotter than expected numbers from both and on Tuesday, suggests that the will continue lifting interest rates for months to come.

also rose 0.4% to 1.2073, retaining some strength after surging 1% at the start of the week after Britain struck a post-Brexit Northern Ireland trade deal with the European Union.

However, dollar losses are likely to be limited as economic data has tended to paint a picture of a resilient US economy with sticky , suggesting more hikes to come.

"This week's key data releases will be the ISM surveys, and in particular Friday's ISM services index, which served as a benchmark for the rapid swings in US growth sentiment over the past two prints," said analysts at ING, in a note.