* Euro up 0.2 percent at $1.4290; up 0.3 percent vs yen
* Yen retreats from 7-wk high vs dollar
* ECB seen standing pat; focus on Trichet
* Euro zone final Aug services PMI improves to 49.9
(Recasts, adds quotes, prices, changes dateline prvs TOKYO)
By Tamawa Desai
LONDON, Sept 3 (Reuters) - The euro edged higher against the dollar and yen on Thursday ahead of a European Central Bank policy meeting widely expected to leave rates unchanged.
The yen retreated from a seven-week high against the dollar after a rally in Chinese shares prompted investors to trim holdings of the low-risk Japanese currency, helping the dollar and euro.
Dealers took their cue from stock indices but markets were becoming somewhat wary as policymakers have indicated a cautious stance on the economic outlook. Big positions were also being avoided ahead of key U.S. jobs report on Friday.
"The market is becoming more cautious toward risk assets, positioning for a potential downward correction," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, noting September was generally an unfavourable month for stocks.
As such, reaction was subdued to an improvement in the euro zone services Purchasing Managers' Index, which showed a final reading of 49.9 in August from a flash estimate of 49.5.
At 0802 GMT, the euro was up 0.2 percent at $1.4290 while it was up 0.3 percent at 131.96 yen.
The ECB will make its policy announcement at 1145 GMT, where it is expected to keep rates at a record low 1.0 percent. Markets will watch comments by ECB President Jean-Claude Trichet at 1230 GMT. Trichet is expected to acknowledge improvements in the economy but still retain a cautious stance, analysts said.
Ahead of the ECB, Sweden's central bank left its key interest rate at a record low of 0.25 percent as widely expected, and said it is expected to remain low over the coming year.
The euro rose to a session high of 10.3400 crowns from around 10.29 crowns before the decision and statement, according to Reuters data.
YEN BID HIGHER
The dollar fell as low as 91.94 yen on trading platform EBS on Thursday, its lowest since July 13, as investors continued to cut dollar holdings after a weaker-than-expected U.S. private-sector jobs report on Wednesday.
The U.S. currency later edged up, last trading at 92.32 yen, up 0.1 percent from late U.S. trade on Wednesday.
The Shanghai Composite Index was up more than 4 percent, although Tokyo's Nikkei share average dipped 0.6 percent while S&P futures were mildly positive.
Dealers said a sustained break of 92.00 yen was likely to see the dollar test July's low of 91.73 yen and some cautioned a weaker payrolls reading could drive it down to the 90 yen level.
Margin traders at the Tokyo Financial Exchange cut their net long positions in dollar/yen by 84,125 contracts to 24,601 contracts on Wednesday, when the dollar slid to a seven-week low of 92.10 yen on EBS.
Such position unwinding likely contributed to the dollar's fall on Wednesday, said Tomoko Fujii, a senior currency strategist at Bank of America Securities-Merrill Lynch.
"This also means that the remaining positions are very light so further position pressure from these people must also be lighter," she said.
The Australian dollar rose 0.4 percent to $0.8375, supported by gains in gold prices, traders said. (Additional reporting by Kaori Kaneko in Tokyo; editing by Chris Pizzey)