* European shares up 1.2 pct after Shanghai rallies 4.5 pct
* Norwegian crown boosted as GDP unexpectedly grows
* Sterling down as UK public finances weigh
(Adds comment, details, updates prices)
LONDON, Aug 20 (Reuters) - The yen initially slipped on
Thursday as a recovery in Chinese shares raised some risk
appetite, but losses were trimmed as markets looked to U.S.
equity markets for direction in thinned holiday trade.
Currency traders took cues from a 4.5 percent gain in the
Shanghai Composite Index <> on Thursday, which helped to
pull European shares <> up 1.2 percent.
"Chinese stocks bounced back which helped some higher risk
currencies but it's mostly subdued now as the markets are
waiting to see whether U.S. stocks bounce back," said Geoffrey
Kendrick, senior currency strategist at UBS.
U.S. S&P 500 stock futures index was up 0.2 percent <SPc1>,
pointing to a higher open on Wall Street.
By 0938 GMT, the dollar was flat against the yen at 94.11
yen after hitting to a session high of 94.55 yen <JPY=>.
Traders cited options with a strike price around 94.00 yen
were set to expire later in the day, keeping the pair near that
level.
The euro was down 0.1 percent at 133.77 yen <EURJPY=R>,
after rising to 134.62 yen earlier. Against the dollar, the
single currency was little changed on the day at $1.4232 <EUR=>.
Market participants have been focusing on Shanghai stocks
after it shed nearly 20 percent in the past two weeks, rattling
investor confidence in a global recovery.
"It is an understandable reaction as Chinese equities have
acted as a good leading indicator for broader market dynamics
over the past year," Lee Hardman, currency economist at Bank of
Tokyo-Mitsubishi UFJ said in a note.
But he said perceptions that China's economic recovery is
essential to global recovery may be overdone.
"We would argue that the equity market has been largely
liquidity fuelled rather than a true reflection of the
improvement in the Chinese economy," and the recent correction
may just be reflecting valuations that are more in line with
fundamentals, he said.
Meanwhile, China's People's Daily said on Thursday China has
no choice but to increase its holdings of U.S. government debt
for now, adding diversifying the nation's foreign exchange
holdings would be a painstaking shift. []
NORWEGIAN CROWN JUMPS
The Norwegian crown jumped, rising against the euro to its
highest level since March, after data showed Norway's non-oil
economy rose an unexpected 0.3 percent in the second quarter.
[]
That came after the Norges Bank said last week interest rate
increases could take place earlier than during the second
quarter of 2010 as inflation remains benign and the economy is
stabilising.
"There is potential for Norway to be the first country to
raise interest rates, and that should be positive for the
crown," said UBS's Kendrick.
The euro fell as low as 8.5495 crowns <EURNOK=D4>, its
lowest since March 24, according to Reuters data. It was last
down 0.1 percent at 8.6093.
Australia is also seen as another country that may raise
rates sooner than most of its G10 peers. The Australian dollar
was flat on the day at $0.8303 <AUD=D4>.
Sterling fell 0.3 percent to $1.6475 <GBP=> as weak data on
British public finances highlighted concerns about the country's
fiscal situation and offset solid retail sales numbers.
(Additional reporting by Naomi Tajitsu; editing by David Stamp
and Andy Bruce)
