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TOKYO, Sep 6 (Reuters) The yen eased against the dollar and euro on Wednesday, taking a breather from a short-covering rally that pushed the Japanese currency to two-week highs earlier this week.

The yen had rallied after solid Japanese capital spending data on Monday prompted traders to trim huge yen short positions that had piled up since late last month when Japan's consumer price data for July came in below expectations.

But its rally fizzled this session as such yen-buying subsided and as Japanese investors snatched up dollars and euros, attracted by their higher yields, traders said.

''I think Japanese customers, probably mainly individuals, are stepping in to buy dollars at levels near 116 yen and also at levels above 115 yen because of interest rate differentials,'' said a dealer for a Japanese bank.

Other traders said the yen was hurt due to dollar buying by Japanese institutional investors and importers.

The dollar stood at 116.35 yen as of 0540 GMT, up from around 116.10 yen in late U.S. trading on Tuesday, and off a two-week low of 115.57 yen hit on electronic trading platform EBS on Tuesday.

The euro edged up to 149.10 yen compared with around 148.80 yen in late U.S. trading, and off Tuesday's two-week low of 148.25 yen on EBS.

Against the dollar, the euro was little changed at $1.2812.

The yen got a a very small lift to around 116 yen from around 116.06 yen earlier in the session on news that Japan's Princess Kiko had given birth to a baby boy, the first male heir born into the royal family in more than four decades.

The Australian dollar fell after data showed that Australia's second-quarter gross domestic product grew a smaller-than- expected 0.3 percent from the previous quarter.

The Australian dollar stood at 76.80 U.S. cents down from around 77.10 cents in late New York trading.

EVENT RISKS Monday's upbeat capital spending data has kept alive the possibility that the Bank of Japan could boost interest rates again later in the year after lifting them for the first time in six years in July.

Traders said they were waiting for BOJ Governor Toshihiko Fukui's comments after a two-day BOJ policy board meeting ends on Friday to hear the central bank's view on core consumer prices and the implications they may have on monetary policy.

''I don't think the weak yen trend has reversed course, but things might change depending on what Fukui says,'' the trust bank dealer said.

In the near-term, the yen could resume its rise ahead of a Group of Seven finance ministers meeting in Singapore later this month, where discussions may touch upon the issue of global imbalances -- a potentially negative topic for the dollar, traders and analysts say.

''Yen buying is likely to continue for now as the market shifts its focus to political issues from interest rate differentials and as players feel the need to square positions after piling up huge yen short positions,'' said a dealer at a Japanese bank.

A report released on Tuesday by the Organisation for Economic Cooperation and Development, which said Japan should avoid raising interest rates until it has more clear-cut evidence that core inflation is firmly in positive territory, was cited by some traders as a potentially negative factor for the yen.

In contrast, the OECD said the Federal Reserve may need to raise interest rates further to ensure price stability and the European Central Bank can afford to raise euro zone rates towards neutral levels now that the economic recovery looks solid enough.

REUTERS CS DS1401