* Yen rallies, dollar index inches higher as stocks slide
* Aussie down as CPI dents expectations of bigger rate hike
* Norges Bank expected to raise rates
(Recasts, updates prices, adds quotes and comment)
By Jamie McGeever
LONDON, Oct 28 (Reuters) - The yen strengthened across the board and the U.S. dollar inched higher on Wednesday as the recent shadow over global stocks darkened, prompting currency traders to trim positions and reduce risk exposure.
The slide in European shares, led by declines in the banking and energy sectors, accelerated the currency moves started earlier in the day by the Australian dollar's sharp fall after the release of domestic inflation data.
Australian consumer price inflation was generally in line with forecasts but not strong enough to justify expectations for an aggressive interest rate increase next week, which pushed the Australian dollar to a two-week low.
This followed surprisingly weak U.S. consumer confidence figures on Tuesday.
Benchmark European shares fell 1.8 percent to a three-week low, with banking shares significantly underperforming to hit a near two-month low as Irish banks slid sharply.
"Equity markets are going to struggle for a period. There are certainly question marks to be posed about the ability to maintain momentum when more central banks are gradually moving toward exit strategy mode," said Derek Halpenny, senior currency economist at BTM-UFJ in London.
"The data's not compelling any more in terms of confirming strong recovery," he said.
At 1030 GMT, the dollar was down around 1 percent against the yen at 90.90 yen, retreating from a one-month high of 92.33 yen hit on EBS the previous day.
The spread of 10-year U.S. Treasury yields over Japanese government bond yields shrank to 200 basis points from as much as 215 bps the previous day after a well-received U.S. 2-year note auction. This also weighed on dollar/yen.
The euro was down 1 percent at 134.50 yen, pulling back from a more than two-month high of 138.49 yen hit on trading platform EBS on Monday.
The dollar index, a gauge of its performance against six major currencies, was up 0.1 percent at 76.21, holding close to a two-week high of 76.328 on Tuesday.
The euro was down 0.1 percent at $1.4790, having earlier flirted with the two-week low of $1.4769 struck the previous day. It had hit a 14-month high of $1.5064 on Monday.
NORWAY TO RAISE RATES?
The Australian dollar was down 1.3 percent on the day at $0.9045, and overnight interest rate swaps markets showed investors now looking for no more than a 25 basis point rate rise at the Reserve bank of Australia's meeting next week.
Even after the CPI data on Wednesday, swaps markets still had 200 basis points of tightening from the Reserve Bank of Australia priced in over the next year.
"We've had an almost uninterrupted increase in the Aussie dollar since the end of June, and an acceleration of that move in October, so there's bound to be a lot of profit-taking," said Johan Javeus, strategist at SEB in Stockholm.
Attention in Europe turns to Norway, with Norges Bank expected to become the first European central bank to raise interest rates since the global financial and economic crisis.
A quarter point rate rise to 1.5 percent is so widely anticipated that traders sold the Norwegian crown against the euro on Wednesday, cashing in on its sharp rise to a 14-month high earlier this month.
"This outcome is well anticipated so the relevant question is whether or not the tone will turn significantly more hawkish, suggesting an acceleration of the tightening cycle. We don't think this will be the case," said Societe Generale strategists in a note to clients.
Data on Wednesday showed Norway's unemployment rate rose a bit more than expected in August, pushing the euro to a three-week high of 8.4425 crowns. Earlier this month it fell below 8.25 crowns for the first time since August 2008. (Reporting by Jamie McGeever; editing by Mike Peacock)