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
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 and euro gained back some ground against the yen but were firmly in recent ranges, reflecting the drop in 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.
But 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.
"The last year's story has been of a steady move back to long-term fair value for many currencies and for the Aussie that tends to point to levels around 83-84 (U.S. cents)," said Simon Derrick, strategist with Bank of New York Mellon in London.
"So maybe we should not be so surprised that the RBA (Reserve Bank of Australia) is starting to moderate its language as we begin to get within sight of those levels."
After rising as much as 1.8 percent against the U.S. dollar, the Aussie was trading 1.7 percent higher at $0.8893 in midday trade in Europe.
There had already been signs of a turnaround in the Aussie's performance against the New Zealand dollar in the past week. A favourite trade for hedge funds late last year, the kiwi gained 9.5 percent against the Aussie between October and Jan. 24. Since then the Aussie has reclaimed around 3 percent.
While the New Zealand economy continues to do better than its Australian counterpart, analysts say a full percentage point of rate hikes are now fully priced in, leaving room for some pull back.
Domestic politicians have also begun to sound disturbed by the kiwi's strength.
"Clearly they are hoping that a similar story to the Aussie plays out now for New Zealand, although they are burdened by a very different monetary policy outlook," Derrick said.
"My view is that the kiwi should also begin to inch back toward similar long-term averages around 83-84."
Still, the kiwi gained another 0.9 percent against the U.S. dollar on Tuesday to trade at $0.8153.
The Aussie's jump 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 0.3 percent at 101.24 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, is 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 euro was also up around 0.3 percent against the yen at 136.91 yen, having set a two-month low of 136.37 yen on Monday.
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