* Dollar hovers below 1-month high at 85.94 yen
* Euro hits 1-month high vs dollar, cable also up
* Dollar index falls, yen crosses rise
* Australian dollar hits two-year high vs U.S. dollar
(Adds quotes, changes dateline, Previous TOKYO)
By Anirban Nag
LONDON, Sept 17 (Reuters) - The dollar held steady near a one-month high against the yen on Friday, with investors nervous about pushing it too far against the yen as the threat of Japanese intervention hung over the market.
But the dollar fell against other majors, with the euro surging 0.5 percent to a one-month high, while sterling also hit its highest in a month. The yen fell on the crosses, dropping to its lowest in more than a month against the euro and a four-month trough versus the higher-yielding Aussie.
"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 0728 GMT, the dollar was broadly flat against the yen at 85.84, not far from a one-month high of 85.94 struck earlier this week. Traders said caution about intervention lends support to the dollar when it nears 85.00 yen.
They added hedge funds who had been dollar bears were cutting long yen positions since Wednesday's Japanese intervention to rein in the yen and some were not finished yet.
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 substantial sell orders lined up between 86 and 87 yen.
Japanese markets are closed on Monday and Thursday next week for public holidays.
The euro climbed to $1.3147 in early European trade, matching a five-week high hit earlier in the session. Traders said demand for euros from Asian sovereign names and a UK clearer helped the single currency across the board.
The euro rose as high as 112.85 yen on electronic trading platform EBS, its highest since Aug. 10.
The dollar index, a gauge of its performance against six other major currencies, dropped to a five week low of 80.89. The index broke down through its 100-day moving average this week on speculation the Federal Reserve would turn to more quantitative easing later this year.
JAPAN TO EXPLAIN INTERVENTION
The dollar climbed as far as 85.94 yen on Thursday, its strongest since mid-August and challenging resistance from its 55-day moving average at that level.
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.
"The real key positioning is probably what the corporates and Japanese investors need to do and I think there are still corporates out there that need to sell," said Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney.
Japan is considering increasing the amount of funds available for currency intervention, Kyodo news agency said late on Thursday, citing sources close to the matter..
Money market data from the Bank of Japan late on Thursday showed Wednesday's intervention may have totalled about 1.76 trillion to 1.86 trillion yen ($20.5-$21.7 billion), in line with estimates circulating in the market..
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.
Kan reshuffled his cabinet, retaining Finance Minister Yoshihiko Noda, who oversaw Wednesday's intervention.
Noda said Tokyo needed to explain its stance to other countries when it came to intervention, after the action sparked criticism from policymakers overseas and raised worries about competitive devaluations. But he said Japan remained ready to step into the market again if necessary.
The Australian dollar hit a two-year high of $0.9465, up 1 percent on the day
(Additional reporting by Tokyo Forex team)