(Adds new quote, updates prices)
* Norwegian inflation surprises, pushing crown almost 1 pct higher
* Yen off highs as investors become less cautious
* Investors watching geopolitical developments for cues
By Jemima Kelly
LONDON, Aug 11 The Norwegian crown soared to a seven-week high against the euro on Monday after Norway reported consumer inflation unexpectedly jumped in July, as investors trimmed expectations that the central bank would cut interest rates.
The crown surged around 1 percent against the euro after the data amid high trading volumes, hitting 8.2835 crowns per euro . That was its strongest since June 19, when the currency dived after the Norges Bank hinted at a possible rate cut if the economy weakened.
Monday's data, showing Norway's core inflation rising above the Norges Bank's long-term target to 2.6 percent in July, prompted investors to start pricing out the risk that rates would be cut.
"I think the Norges Bank will probably take a more guarded tone towards inflation risks and Norwegian crown weakness at its September rate decision," said Stephen Gallo, head of foreign exchange strategy at BMO Capital Markets.
"But persistent Norwegian crown strength and inflation rates consistently above the G10 average are not good for Norwegian competitiveness. The non-resource trade deficit is still a medium-term downside risk (to the crown)."
The Norwegian crown's gains also helped push its Swedish counterpart higher on Monday, hitting a 12-day peak of 9.1856 crowns per euro, up 0.5 percent on the day.
The Scandinavian moves - easily the biggest in developed currency markets - took the focus away from a broader shift to riskier plays, which saw the yen backing off from the highs it reached last week, when fighting in Ukraine and Gaza fuelled demand for the safe-haven Japanese currency.
The dollar was over half a percent above a two-week trough of 101.51 yen that it had hit on Friday. It initially rebounded late last week on news that Russia was ending military drills near the Ukrainian border, helping U.S. stocks post their best one-day gain since March.
"It's essentially a risk-on move that we've hit ... which is a legacy of last Friday," said Daragh Maher, a currency strategist at HSBC.
The euro was flat at 136.73 yen, around 0.8 percent above an 8 1/2-month low of 135.73 hit on Friday.
HSBC's Maher warned that investors could quickly turn risk-averse again, given the volatility in Gaza and Ukraine.
"All these situations can turn around, so there'll be reasonably low conviction in terms of these risk-on FX trades."
In an overview of the years since the financial crisis, U.S. Federal Reserve Vice Chair Stanley Fischer said the U.S. and global recoveries have been "disappointing" so far.
Some thought Fischer would adopt a more hawkish tone after a run of more robust U.S. data. But despite a strong rebound in the second quarter, the U.S. growth for July-September remains uncertain.
The outlook for the global economy does not look bright enough to encourage strong risk-taking at this juncture, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
Japan's economy might also struggle to bounce back in the third quarter after taking a hit in April-June from a consumption tax increase enacted in April, Murata said.
"The current situation isn't as good as people had expected, and I think it's difficult to expect risk appetite to strengthen.
"We think the dollar will continue to find it difficult to push higher versus the yen," Murata said, adding that it was also notable that the U.S. 10-year Treasury yield was still hovering at levels roughly around 2.4 percent. (Additional reporting by Ian Chua and Masayuki Kitano; Editing by Janet Lawrence)