FOREX-Aussie surges after central bank drops easing bias, yen edges down vs dlr
* Aussie jumps after RBA drops easing bias
* Yen eases back from previous day's 2-month high vs dollar
* Selling of yen by Japanese banks supports dlr/yen -trader
* Disappointing U.S. ISM data sparks rout in risk demand
SINGAPORE, Feb 4 (Reuters) - The Australian dollar stole the limelight on Tuesday, surging over half a U.S. cent after Australia's central bank surprised some traders by dropping its bias towards easing rates.
The Aussie's sharp jump came just as the yen eased back from a two-month high versus the U.S. dollar, though its losses were tempered by fragile sentiment after a disappointing reading on U.S. factory activity stirred concerns about the outlook for economic growth.
The shift to a more neutral policy setting by the Reserve Bank of Australia (RBA) was announced along with a widely expected decision to keep the main cash rate unchanged at a record low of 2.5 percent.
The RBA's statement delivered a clear message that interest rates are now on hold, said Greg Gibbs, FX strategist for RBS in Singapore. It points to a shift from "a soft easing bias to a clearly neutral bias," he said.
The RBA also tweaked its wording on the Australian dollar. In its December statement the RBA had said the Aussie was "uncomfortably high", but on Tuesday the bank only said that a lower currency will aid the economy if sustained.
The Australian dollar jumped 1.4 percent on the day to $0.8875 and climbed 1.7 percent versus the yen to 89.81 yen.
The yen also stepped back versus the U.S. dollar, taking a breather in the wake of its rally to a two-month high on Monday, when a selloff in risk assets forced investors to cover bearish bets against the low-yielding Japanese currency.
The U.S. dollar rose 0.2 percent to 101.21 yen, staying above Monday's low of 100.77 yen, the dollar's lowest level against the Japanese currency since Nov. 21.
Yen-selling flows from Japanese banks helped lend support to the dollar, said a trader for a European bank in Tokyo. Separately, a Singapore-based trader cited dollar buying by Japanese importers.
The dollar had retreated versus the yen on Monday after data showed that U.S. manufacturing activity slowed sharply last month, dealing a heavy blow to markets already jittery about a selloff in emerging markets.
"A poor ISM manufacturing print exacerbated growth fears and further directs attention to the non-farm (U.S.) payrolls due at the end of this week, after the December release's dismal showing," analysts at JPMorgan wrote in a note to clients.
The disappointing U.S. data helped trigger a drop in U.S. 10-year Treasury yields, undermining the dollar's yield attraction. The U.S. 10-year last stood at about 2.58 percent , not far from Monday's a three-month low of 2.570 percent.
Still, some analysts cautioned against reading too much into the results of the ISM's manufacturing report at this stage, given the possible impact from frigid weather conditions in the United States.
"The cold wave is said to have had some impact on the ISM, and I think it is premature to make a judgment that the trend in the U.S. (economy) has been broken," said Daisuke Karakama, market economist for Mizuho Bank in Tokyo.
When viewed over the longer term, the dollar's dip versus the yen may be an opportunity to buy the greenback, he said.
The yen held steady against the euro, which last stood at 136.65 yen. The euro had set a two-month low of 136.37 yen on Monday.
Against the dollar, the euro eased 0.1 percent to $1.3508 .
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