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NEW YORK, Aug 30 (Reuters) - The yen climbed on Thursday, recovering some of the previous day's decline, as investors maintained a long-term trend of reducing risky bets in response to troubled credit markets.
High-yielding currencies such as the Australian dollar and British pound slipped as investors closed out carry trades due to fears that more restrictive lending standards due to the subprime mortgage mess could drag on global economic growth.
Years of unusually low volatility have helped to propagate the currency carry trade, in which investors borrow in a low-yielding currency such as the yen to finance purchases of higher-yielding assets.
"There is another shoe to drop somewhere in the ongoing subprime saga," said Andrew Bekoff, chief investment strategist at Printz Capital Management in Philadelphia. "Risk is still unwinding."
The euro fell 0.8 percent to 157.73 yen <EURJPY=>, though it was off the session low of 156.80. The pair has swung sharply between 159.00 and 154.50 yen over the past two days. The move also dragged the euro down 0.4 percent versus the dollar, to $1.3621 <EUR=>.
The dollar slipped 0.4 percent to 115.78 yen <JPY=> after it posted its biggest daily percentage gain against the yen since January 2005 on Wednesday on a surge in U.S. stocks.
The Australian dollar dropped 1.3 percent to 94.31 yen <AUDJPY=R>, while the pound fell 0.6 percent to 232.94 yen <GBPJPY=R>.
While dealers and investors awaited the outcome of a slew of central bank meetings next week, including the European Central Bank, the Bank of Canada and the Reserve Bank of Australia, more fallout from credit market woes surfaced.
The Royal Bank of Scotland (RBS.L: Quote, Profile, Research) said it was reducing its collateralized debt obligations unit after a drop in market appetite, confirming the departure of a leading CDO executive.
The fall in the euro on Thursday came just a day after it posted its biggest one-day rise versus the yen since March 2004.
The correlation between the yen and U.S. stocks has been a large factor in currency trading in recent weeks, with investors using stocks as a barometer of risk appetite.
Investor attention is now shifting to a speech by Fed Chairman Ben Bernanke on Friday.
In a letter released on Wednesday, Bernanke reiterated that the central bank was "prepared to act as needed" to ensure credit market problems do not adversely affect the economy, fueling speculation about a cut in the benchmark interest rate.
Any indication that Bernanke sees more weakness in the U.S. housing market could exacerbate financial market volatility and increase expectations the Fed will cut interest rates this year to shore up the economy -- which could be yen positive.
"The attention in the foreign exchange market is on the yen, with a further rebound stimulated by a combination of potential factors tomorrow: dovish comments from Bernanke, soft U.S. economic data and stable stock market conditions heading into a long weekend," said Michael Woolfolk, senior currency strategist with The Bank of New York Mellon.
(Additional reporting by Steven C. Johnson in New York)