The dollar and yen recovered losses on Thursday as risk-taking sentiment was tempered ahead of a European Central Bank policy meeting later in the day and key U.S. jobs data on Friday.

Upbeat U.S. and Chinese manufacturing data on Wednesday had lured investors away from perceived safe-haven currencies and assets, lifting stocks, commodities and higher-yielding currencies.

With so much uncertainty, the market is very volatile and moves depend on the daily data flow, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. In the longer term, the outlook still is unfavourable for risk assets with the U.S. economy in a soft patch.

By 0744 GMT, the dollar index, a gauge of the greenback's performance against a basket of six major currencies, was steady on the day at 82.557 .DXY after falling 0.8 percent on Wednesday, its biggest one-day fall in six weeks. Support was seen at the Aug. 18 low of 81.912.

Investors are not aggressively taking risks yet, feeling they need to see the U.S. employment figures before deciding how much risk they can really take, said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank.

Data on Wednesday showed U.S. private employers unexpectedly cut jobs in August, boding ill for the closely watched non-farm payrolls report on Friday, which is expected to show a fall of 100,000 in August.

The dollar slipped against the yen, and was down 0.3 percent to 84.12 yen JPY=, moving towards a 15-year low of 83.58 yen hit last week.

The yen showed limited reaction to comments by Japanese political heavyweight Ichiro Ozawa, who said action was needed to stem rapid rises in the yen. Ozawa is pitted against Prime Minister Naoto Kan in a party leadership race.

The euro fell 0.5 percent against the yen to 107.54 yen EURJPY=R after jumping 1.4 percent the previous day.

ECB AWAITED

The ECB is seen keeping its benchmark refinancing rate at 1.0 percent at Thursday's meeting. It is also expected to extend lending support for banks despite raising its economic growth forecasts as it seeks to balance a multi-speed recovery among the 16 countries in the euro zone.

Traders will be watching to see whether ECB President Jean-Claude Trichet, who is due to hold a news conference at 1230 GMT, makes a formal decision to extend liquidity to help the banking system and whether he reiterates a cautious stance on the economic outlook after robust second-quarter figures.

The euro fell 0.2 percent to $1.2780 EUR=, down from a high of $1.2856 the previous day.

The next target for the euro is around $1.2873 -- a 38.2 percent Fibonacci retracement of its fall from its August peak of $1.3334 to its August low of $1.2588. The target after that would be $1.2923, touched on Aug. 18.

French and Spanish auctions kick off the month's euro zone bond calendar after a relative drought of supply in August. Revised second-quarter euro zone growth data is also due out.

Sweden's central bank raised its key interest rate to 0.75 percent, as expected.The Swedish crown rose to a session high against the euro of around 9.3100 EURSEK=D4.

The Australian dollar fell 0.5 percent to $0.9066 AUD=D4 after data showed Australia's July trade surplus came in below market expectations.

The Aussie hit a three-week high of $0.9117 on Wednesday on news that the Australian economy grew at its fastest pace in three years in the second quarter. (Additional reporting by Rika Otsuka in Tokyo; Editing by Susan Fenton)

Australia