* Dollar hovers near 1-month high 85.94 yen, dlr index slips
* Euro
* Australian dollar hits two-year high vs U.S. dollar
(Adds quote, updates prices)
By Anirban Nag
LONDON, Sept 17 (Reuters) - The dollar hovered within striking distance of a one-month high against the yen on Friday as the threat of further Japanese intervention kept the yen on the back foot versus major currencies.
But the dollar fell against other currencies, with the euro hitting its highest in more than a month and the Australian dollar soaring to its strongest since mid-2008 as higher share prices suggested improving demand for risky assets.
"The dollar is being hurt by talk of more quantitative easing and you have the Bank of Japan, which is leaving its intervention proceeds unsterilised," said Ian Stannard, senior currency strategist at BNP Paribas.
"This surge in global liquidity is supporting growth-linked currencies while the dollar is being supported against the yen on risks of more intervention by the Japanese."
By 1106 GMT, the dollar was flat at 85.78 yen
Traders said caution about further intervention, since Japan intervened in the market for the first time in six years on Wednesday, lent support to the dollar if it fell near 85.00 yen.
They added hedge funds which had been dollar bears were cutting long yen positions. Dealers also said Japanese exporters, who close their books for the half-year this month, may cap the dollar with sales around 86.00 yen. One trader said there were large sell orders lined up between 86 and 87 yen.
"It is a battle between Japanese exporters and the authorities and it is crucial for the yen to close around 86 yen this week," said a strategist at a Japanese bank in London.
He added that a close above that level may enable authorities to convince exporters that intervention is working and alleviate some of their hedging pressures.
Japanese markets are closed on Monday and Thursday next week
for public holidays.
The euro
The single currency pulled back from gains as peripheral euro zone bond yield spreads widened, highlighting concerns over the economy and banking sector in the 16-country bloc.
The euro
The dollar index <.DXY> plumbed a five-week low of 80.865.
JAPAN TO EXPLAIN INTERVENTION
A 0.8 percent rise in European shares <.FTEU3> suggested demand for riskier assets despite lingering concerns about the stability of the global economic recovery.
Analysts said that while U.S. data indicated a sluggish recovery, it did not suggest a "double dip" recession and investors were creeping into higher-risk currencies.
"There's a feeling that fears of a double-dip recession are largely priced," said Carl Hammer, chief currency strategist at SEB in Stockholm.
"The market is heavily overweight on the bond market, and it looks like the risk reward still on risk-seeking trades. In that environment, the dollar is underperforming cyclical currencies, including the Aussie dollar."
The dollar faced resistance at 85.94 yen, a one-month high hit on Thursday and its 55-day moving average.
It faces further resistance at 86.30 yen, the bottom of the resistance cloud on its Ichimoku chart, but traders also cited stop-loss buy orders above 86.00 and 86.35.
Bank of Japan data on Thursday showed Wednesday's intervention may have totalled around 1.80 trillion yen ($20.98 billion) [ID:nTKW007123].
Japanese Prime Minister Naoto Kan and U.S. President Barack Obama are due to meet on Sept. 23 in New York and Japan's currency market intervention will be on the agenda, the Asahi newspaper said. [ID:nTOE68G006]
(Additional reporting by Naomi Tajitsu)