* Watching for FX diversification comments ahead of G8
* RBA holds rates at record low 3 pct, sees scope to ease
* Australian dollar edges up on short-covering
By Kaori Kaneko
TOKYO, July 7 (Reuters) - The yen edged up against the euro and sterling on Tuesday, as traders fretted that optimism about the global economy's recovery prospects and a risk asset rally in the past few months may have been overdone.
The dollar was steady after hitting a five-week low against the yen on Monday in the wake of last week's bleak U.S. employment data.
"The market environment now is one of investors reducing risk betting but it has not fully returned to risk aversion. It's still in a phase of correcting excessive optimism over the economy recovery seen previously," said Akira Takeuchi, a manager at Chuo Mitsui Trust and Banking.
"The U.S. has had a mixture of positive and negative economic data, which needs to be examined closely. But the market is now prone to react to weak figures," he said.
The yen has gained sharply against the euro, sterling and the Australian dollar in the past few sessions, hitting its highest in five weeks against the pound on Monday at 152.98 yen and a two-week high at 131.73 per euro.
The yen crosses have fallen since early June, after rallying from January to multimonth highs, as the sentiment about global recovery prospects that had driven them up has deteriorated.
The Australian dollar has fallen about 5.5 percent from an eight-month peak at 80.43 yen hit in June and the euro has shed more than 4 percent.
Sterling dipped 0.1 percent to 155.05 yen compared with late U.S. trading on Monday, and the euro fell 0.1 percent to 133.20 yen.
But the Australian dollar edged up against the dollar and the yen.
Australia's central bank left its key cash rate at a record low of 3.0 percent on Tuesday in a widely expected decision, and left the door open to further easing if an anticipated recovery fails to materialise.
The Australian dollar dipped initially after the RBA decision, but that decline proved short-lived, and it later rose to its intraday highs.
The Aussie rose 0.2 percent to $0.7975 and was 0.2 percent higher against the yen at 76.02 yen.
"People who had gone short the Australian dollar probably bought it back," said Yuichi Hojo, director of FX distribution at UBS in Tokyo, adding that the Australian dollar likely fell initially after the central bank kept open the possibility of further monetary easing.
The dollar was little changed at 95.33 yen from late U.S. trade on Monday, when it hit a five-week low of 94.66 yen on trading platform EBS.
The greenback has also been in a correction phase after hitting a six-month high against the yen at 101.45 yen in April but has been stuck in a broad range of roughly 93.50-100.00 yen since then.
"The market lacks a decisive theme," said Kazuyuki Takami, senior manager at Bank of Tokyo-Mitsubishi UFJ.
"The economy has escaped from its worst period but it is unclear whether it will be on a recovery track or it will sink into a double-dip recession," he said.
The market was watching for any comments in the debate on the dollar's role as the world's reserve currency before a meeting of leaders of the Group of Eight industrial nations and leading developing nations on July 8-10 in Italy. (Additional reporting by Masayuki Kitano and Charlotte Cooper; Editing by Chris Gallagher)