FOREX-Euro edges lower, eyes on China data

* Euro a shade lower after dovish comments from ECB

* Markets show little conviction ahead of China PMI data

* Canadian dollar holds gains after inflation shock

By Ian Chua

SYDNEY, June 23 (Reuters) - The euro dipped ever so slightly early on Monday in the wake of dovish comments from the European Central Bank but investors struggled for conviction ahead of a report on China's manufacturing sector.

The common currency briefly slipped to $1.3587 from around $1.3599 late in New York (Frankfurt: HX6.F - news) on Friday after ECB President Mario Draghi said interest rates would stay low over a longer period and that large-scale asset purchases were still part of the central bank's toolkit.

The euro has since recovered to $1.3594. As a result, the dollar index was flat at 80.367, steadying after last week's 0.3 percent fall, its biggest decline in over a month. Against the yen, the dollar was little changed at 102.10.

Traders said the market is likely to stay sluggish until the release of a private report on China's manufacturing sector due at 0145 GMT.. Any disappointment could hit risk sentiment, helping drive the safe-haven yen higher.

"Asia will be focusing on the HSBC flash manufacturing PMI print today which is expected to show an improvement to 49.7," said Stan Shamu, strategist at IG (LSE: IGG.L - news) in Melbourne.

"China data always has the potential to be a big risk mover. With expectations quite high there is always potential for downside risk."

The Canadian dollar, which was a standout performer on Friday, stayed near a six-month high of C$1.0752 per U.S. dollar .

It had rallied hard after data showed the country's annual inflation rate hit a 27-month high of 2.3 percent in May. The outcome was above the central bank's target and challenged the Bank of Canada's accommodative policy stance.

Another currency buoyed by hawkish expectations was sterling, which rose to a 5-1/2 year high of $1.7064 on Thursday. It was last at $1.7021.

One of the Bank of England's most dovish policymakers, David Miles, tried to play down those expectations. In an article published on Sunday, Miles said subdued inflation in Britain would enable policymakers to raise interest rates gradually.

Traders said apart from the report on China's manufacturing activity, the market will also be keeping an eye on developments in Iraq.

Currency markets have yet to show any reaction to the violence in Iraq, although oil prices have risen on concerns over supply disruption.

On Sunday, militants overran a second frontier post on the Syrian border, extending two weeks of swift territorial gains as the Islamic State of Iraq and the Levant (ISIL) pursues the goal of its own power base, a "caliphate" straddling both countries that has raised alarm across the Middle East and in the West. (Editing by Richard Pullin)