FOREX-Aussie surges after central bank's policy turn
* 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
LONDON, Feb 4 (Reuters) - The Australian dollar surged almost two percent on Tuesday after the country's central bank dropped its bias towards easing interest rates and toned down its long-term call for the currency to weaken.
The dollar, yen and euro were all broadly stable, reflecting a drop in the volatility that has accompanied the flood of money out of emerging economies in search of traditional safe havens in the developed world.
The Aussie has fallen by almost a fifth in the past 12 months as a commodities boom expired, growth in China began to slow and the central bank campaigned for a weaker currency to help stir economic growth.
Some strategists have begun to turn more positive and there has also been talk in the market of Chinese investors buying the Australian currency at the start of the Year of the Horse. But the Reserve Bank of Australia's signals on Tuesday were a surprise to many.
"Together, these statements suggest that the exchange rate is approaching levels at which the RBA is more comfortable and that policymakers are removing the threat of using their most powerful tool to drive it lower," Citibank analysts said in a note for European clients.
"This will be viewed as the market as an all-clear signal on the currency and is likely to invite a further reversal of short positions among leveraged investors."
The Aussie's jump - as much as 1.8 percent against the greenback - came 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 growth outlook.
The U.S. dollar was up 0.2 percent at 101.16 yen, staying above Monday's low of 100.77 yen, its 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. A Singapore-based trader cited dollar buying by Japanese importers.
The yen, a big loser against the dollar in the past year, has seen a turnaround in the past week on the back of the sell-off in emerging markets, the dollar falling back from a peak of 105.40 yen hit earlier in January.
Many analysts believe the flow of money out of the developing world will continue as the U.S. Federal Reserve proceeds with reductions in its bond-buying stimulus.
A poor ISM readout on U.S. manufacturing on Monday prodded U.S. Treasury yields lower but, along with similarly poor jobs data last month, are largely being put down to bad weather rather than any fading of the economic recovery.
"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.
The yen held steady against the euro, which last stood at 136.64 yen. The euro set a two-month low of 136.37 yen on Monday. The common currency eased 0.1 percent to $1.3507.
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