The euro bounced on Thursday, as heavy selling abated on early signs euro zone peripheral spreads were stabilizing, while speculation of intervention to weaken the yen drove down the Japanese currency.

The dollar steadied versus a basket of currencies after posting its biggest one-day gain in two years the previous day when concerns about the U.S. and global economies triggered a wave of unwinding in short dollar positions.

The euro sell-off we've seen this week has been down to concerns about the peripheral euro zone economies, but I think that move is temporary and the strength of the recovery in Germany is more important for the euro, said Jane Foley, research director at Forex.com.

The premium that investors demand to hold Irish 10-year bonds over German bunds had widened this week on worries over the Irish economy, but traders said Irish spreads were stabilizing early on Thursday.

Robust German data has been underpinning the euro recently, with next attention centered on release of GDP data for Germany on Friday.

At 0745 GMT, the euro was trading up around 0.6 percent versus the dollar at $1.2915. It had fallen more than 2 percent on Wednesday on a widening in euro zone peripheral spreads and a broad strengthening in the dollar.

Traders noted the euro had steadied ahead of support at its 100-day moving average, coming in at $1.2807.

DOLLAR/YEN RECOVERY

The greenback rose to 85.80 yen from a 15-year trough against the yen marked the day before, aided by market sources telling Reuters the Bank of Japan checked exchange rates with banks earlier on Thursday.

The talk of the BOJ rate checking prompted players to cover short dollar positions, although bearish sentiment persists for the dollar, said an FX trader at a big Japanese brokerage.

Traders noted a large option expiring at 85.00 yen later, which they said could limit movement on the day.

The U.S. currency fell as low as 84.72 yen on trading platform EBS on Wednesday, when it took out option barriers around 85.00 yen and a November low of 84.82 yen. The currency's slide was fueled by a narrowing spread between U.S. and Japanese government bond yields.

Two-year Treasury yields fell to a fresh all-time low on Wednesday a day after the Federal Reserve announced a plan to reinvest the money from maturing mortgage bonds in government debt to help its economy.

The move prompted speculation that Japanese authorities may intervene to weaken the yen, but analysts were skeptical.

Movements in currencies are too far removed from Japanese fundamentals to justify intervention. It's more about Federal Reserve policy, said Forex.com's Foley.

Japanese Finance Minister Yoshihiko Noda was due to hold a press conference at 0830 GMT but a euro zone official told Reuters on Wednesday that European authorities would not welcome intervention by Japan and joint intervention by major central banks was not on the cards.

The dollar traded up around 0.5 percent at 85.70 yen. The euro traded up over 1 percent against the yen at 110.72 yen after falling to 109.20 in Asia.

The dollar index, a gauge of the greenback's performance against six major currencies, was down 0.1 percent on the day at 82.147 .DXY, but well above its 200-day moving average, now at 80.898.

(Additional Reporting by Rika Otsuka, editing by Andrew Heavens)

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