* Euro hovers near 1-week highs versus dollar
* Lower U.S. debt yields put dollar on defensive against yen
* Sterling hobbles, kiwi suffers collateral damage as Aussie sinks (Adds details, quotes)
By Shinichi Saoshiro
TOKYO, July 24 (Reuters) - The euro hovered near one-week highs against the dollar on Friday on relief from Greece taking another step towards a bailout, while the Australian dollar sank to a six-year low after weak China factory data.
The Aussie, often used as a liquid proxy for China trades, hit a six-year trough of $0.7295 AUD=D4 after the flash Caixin/Markit July Manufacturing Purchasing Manager's Index showed China's factory sector contracted by the most in 15 months, deepening worries over the health of the world's second-largest economy. ID:nS7N0ZB006 ECONCN
Slowing Chinese growth means less demand for commodities such as iron ore, one of Australia's chief exports. The recent decline in a wide range of commodities, including oil, has weighed on currencies like the Canadian and Australian dollars.
"With commodity currencies suffering direct hits from lower commodities, the question is what to buy after you sell units like the Aussie," said Koji Fukaya, president of FPG Securities in Tokyo.
"If you believe U.S. rates will go up, the dollar is the choice. But if you do not have confidence in the global economy, the yen will be your destination," he said.
The euro stood steady at $1.0976 EUR= and within close range of a one-week high of $1.1018 struck overnight. The common currency was lifted after the Greek parliament approved a second set of reforms required to start negotiations with lenders in a bid to avoid bankruptcy.
Still, with the U.S. gearing up to raise interest rates later this year and with Greece's long-term ability to stay solvent still in doubt, analysts saw the euro declining in the long run.
"News from Greece helped, but fundamentally speaking, euro/dollar remains on a downtrend in the long run. European economic indicators and inflation data are not as strong as they were at the start of the year, and of course the U.S. is steadily preparing to hike rates," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.
While the monetary divergence theme - the Federal Reserve has its sights on raising rates while the European Central Bank and Bank of Japan are still deeply committed to monetary easing - is widely expected to favour the dollar, the greenback hit a bump against the yen as well.
The dollar treaded water at 123.93 yen JPY= after failing to consolidate near an overnight high of 124.19.
The U.S. currency poked above 124.00 yen on Thursday after stronger-than-expected U.S. jobless claims but went on the back foot as Treasury yields fell to two-week lows on a continued decline on Wall Street and deflation concerns prompted by sliding commodities.
Sterling hobbled at $1.5506 GBP=D4 after slipping from a one-week peak of $1.5671 on Thursday, when it sank 0.6 percent.
British retail sales fell unexpectedly in June, taking some of the lustre off the pound following signs that the Bank of England was edging toward hiking rates.
The New Zealand dollar, one of the biggest-moving developed economy currencies this week, suffered collateral damage as the Aussie sank.
The kiwi was down 0.2 percent at $0.6591 NZD=D4 , pulling away from a one-week high of $0.6695 reached on Thursday after the Reserve Bank of New Zealand (RBNZ) delivered a smaller rate cut than some had expected.
The kiwi had retreated to a six-year low of $0.6498 NZD=D4 last week in the wake of expectations towards RBNZ easing. (Editing by Eric Meijer and Jacqueline Wong)