* Yen drops, correcting sharp gains from Wednesday
* Euro surges vs dollar as risk appetite recovers
* U.S. initial jobless claims bolster optimism slightly
* Sterling shines as BoE holds asset purchases steady
* Aussie gains but Australia-China rift casts shadow (Updates prices, adds details)
By Steven C. Johnson
NEW YORK, July 9 (Reuters) - The dollar fell against most major currencies on Thursday and the yen gave up its sharp recent gains as a decline in the number of Americans filing for initial jobless benefits eased some concerns about the U.S. economy.
The data encouraged investors to buy riskier assets such as stocks and high-yield currencies and sell the dollar and yen, which are often used to finance riskier trades.
The yen rose broadly on Wednesday, soaring to a five-month high against the dollar amid heavy safe-haven flows, but it retreated Thursday when a Japanese government spokesman said excessive currency moves were undesirable.
"The violence of the move yesterday was a surprise, so I'm not surprised to see a bounce back," said David Watt, senior currency strategist at RBC Capital markets in Toronto.
"People now wonder which trend will be more powerful -- the one seen over the last five days when people sold risky assets or the one today where they're buying risky assets back," he added.
The euro rose 1.1 percent at $1.4031 and 1.1 percent to 130.33 yen after nearing 127 yen on Wednesday, a two-month low.
The dollar was up 0.1 percent at 92.90 yen after hitting 91.82 yen on Wednesday, a five-month low. The dollar's decline against the yen on Wednesday was its biggest one-day loss since March.
Sterling rose 1.7 percent to $1.6343 after the Bank of England did not increase direct purchases of financial assets, quelling market fear about a possible rise in UK inflation.
U.S. JOBS, EARNINGS
Data showing the largest drop in initial U.S. jobless claims since December renewed some appetite for risk, though continued claims rose to a record.
But going forward, "a lot will depend on forthcoming earnings reports and how the equity markets respond," Watt said, adding that better-than-expected earnings from Alcoa late Wednesday contributed to the session's renewed risk appetite.
Strategists at CitiFX warned against chasing the euro higher and suggesting selling it at $1.4055 in anticipation of an eventual move back toward $1.3318, its 200-day moving average against the dollar.
Among other currencies seen as higher risk, the Australian dollar rose 0.6 percent to $0.7828, though analysts said the currency is highly sensitive to concerns about Australia's ties with important trading partner China.
China confirmed the arrest on Thursday of an Australian mining executive accused of spying, raising questions about bilateral relations.
U.S. traders said volatility in the Swiss franc was sparked by talk that Swiss National Bank board member Thomas Jordan had said the central bank wanted to prevent further franc appreciation.
The dollar was down 1.2 percent at 1.0772 Swiss francs.
The SNB has intervened in the market in recent months to weaken the franc, and this would have been the standard comment on the currency, but the SNB declined to comment.