* Yen drops, correcting Wednesday's gains; dlr also down
* Higher risk FX recover as European equities rise 1.1 pct
* Sterling shines as BoE keeps QE target unchanged
* Aussie gains but Australia-China rift casts a shadow
(Updates prices, adds quotes)
By Jessica Mortimer
LONDON, July 9 (Reuters) - The yen and the dollar fell on
Thursday, correcting some of the previous session's gains, while
sterling extended gains after the Bank of England kept its
quantitative easing target unchanged.
A recovery in European stocks helped to buoy the euro and
perceived higher risk currencies, which fell sharply on
Wednesday as optimism about the global economy's recovery
prospects waned and investors trimmed risk exposure.
European equities jumped by 1.1 percent <>, snapping a
five-session losing streak and pushing the yen lower after it
surged broadly on Wednesday, hitting a five-month high against
the dollar.
Analysts noted, however, that the current moves are
corrective and do not represent any fundamental shift in market
sentiment.
"We had a massive move yesterday and the market really
needed to correct," Brown Brothers Harriman currency strategist
Audrey Childe-Freeman said.
"The scale of the rally (in the yen) was overdone and we
have seen some position adjustments, but the market is still
looking quite nervous," she said.
Sterling outperformed meanwhile after the BoE left its
asset buying programme at 125 billion pounds, just as most in
the market had expected the central bank to expand the total by
25 billion pounds. [].
At 1150 GMT, the dollar rose 0.1 percent from late U.S.
trade to 92.94 yen <JPY=>, having hit a five-month trough of
91.80 on EBS trading systems the previous day.
The euro climbed 0.8 percent to 129.91 yen <EURJPY=R> after
falling as low as 127.00 yen on Wednesday, its lowest since
mid-May.
Wednesday's sharp rise in the yen prompted Japan's top
government spokesman to say excessive foreign exchange moves
were undesirable, while Japanese officials said they were
keeping a close watch on currencies [].
For an article on whether Japan will intervene to curb the
yen's rise click on [].
The dollar index fell 0.7 percent to 80.194 <.DXY>, while
the euro was up 0.7 percent at $1.3978 <EUR=> after falling as
low as $1.3830 on Wednesday.
STERLING SHINES
Sterling jumped by 1.2 percent against the dollar to $1.6255
<GBP=D4>, while the euro lost 0.5 percent against the UK
currency to 85.98 pence <EURGBP=R> as the pound extended gains
after the Bank of England policy decision.
The news that it was not expanding quantitative easing came
as the central bank left key interest rates unchanged at 0.5
percent, as widely expected.
"The Monetary Policy Committee has sent a clear signal that
the endgame for QE has arrived," RBS economist Ross Walker said,
who described the decision to leave the QE target unchanged as
"a significant surprise".
Among other currencies seen as higher risk, the Australian
dollar recovered 0.7 percent to $0.7842 <AUD=>, though analysts
said the currency is highly sensitive to concerns about
Australia's ties with its top trading partner China.
China confirmed on Thursday the arrest of an Australian
mining executive and three others on spying allegations, in a
case that has raised questions about China-Australia relations.
[]
These concerns cast a further shadow against the currency on
Wednesday, when it fell more than 1 percent against the dollar
and 3.5 percent against the yen.
"If there were a freezing in the diplomatic temperature
between Australia and China that would not be positive for the
Australian dollar," Rabobank currency strategist Jeremy Stretch
said.
(Reporting by Jessica Mortimer; Editing by Victoria Main)
