SINGAPORE/TOKYO (Sept 1): The yen and euro edged higher on Tuesday as falls in Asian equities kept the focus on whether investors would need to further unwind carry trades, bets in risk assets funded by low-yielding currencies.

Surveys of China's manufacturing and services sector that reinforced worries of a sharper slowdown in the economy helped keep the yen and euro on firm footings.

The dollar fell 0.3% to 120.86 yen, having retreated from its recent peak of 121.76 yen set late last week.

The euro rose 0.5% to $1.1263, extending its recovery from last week's one-week low of $1.1156.

Speculators often use low-yielding currencies to fund positions in higher-yielding currencies and equities, so a worsening outlook for equity markets tends to boost currencies such as the euro and the yen.

In the stock market, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.5%, while U.S. stock index futures fell 1.5%.

Risk appetite had already been dampened by falls in U.S. equities on Monday.

That drop in shares came after comments by Federal Reserve Vice Chairman Stanley Fischer last week were interpreted as not ruling out the possibility of a rate hike in September, even though global financial markets have been through turmoil in recent weeks.

Growing doubts that the Fed would raise interest rates this month in the wake of such market turbulence, have weighed on the dollar in recent weeks.

"Given the way global stock markets have been, I think that seems pretty unlikely," said a trader for a Japanese bank in Singapore, referring to the possibility of the Fed raising interest rates in September.

Even if forthcoming U.S. economic data is relatively strong, the trader said his guess was that the Fed will probably hold off from raising interest rates this month.

Later on Tuesday, investors will turn their focus to a survey of U.S. manufacturing activity.

Against a basket of six major currencies, the dollar fell 0.3% to 95.580. The dollar index had risen 1.2% last week as risk sentiment somewhat recovered.

The Australian dollar rose 0.4% to $0.7141. The Aussie had set a 6 1/2-year low of $0.7044 late last month, reflecting concerns on the Chinese economy.

Sterling edged up 0.3% to $1.5396, having pulled up from an intraday low of $1.5341. Sterling has strong technical support at its July low of $1.5330.

"The market thinks the Bank of England will raise rates only after the Fed will raise rates...There's a chance that sterling could fall further against the dollar," said Shinichiro Kadota, chief FX strategist at Barclays in Tokyo.