* Yen drifts off one-week highs vs USD
* BOJ policy easing in line with expectations
* Risk sentiment improves after solid Italian bond sale
SYDNEY, Oct 31 (Reuters) - The yen drifted off a one-week high against the dollar on Wednesday thanks to a general improvement in risk appetite, paring gains made after the Bank of Japan balked at delivering bolder action to kickstart growth.
The dollar was at 79.59 yen, recovering from a fall to 79.28 when the market unwound long dollar/yen positions after the BOJ expanded its asset-buying programme by 11 trillion yen ($138 billion) in a broadly expected move.
``The BOJ produced no rabbit, and no bazooka policy,'' said Kit Juckes, strategist at Societe Generale.
``The yen remains a sell long term, but as 2-year U.S. Treasury yields drift lower and the BOJ disappoints, we will look to re-buy USD/JPY at lower levels.''
Traders noted there was a small improvement in risk appetite on Tuesday after solid demand at an Italian bond sale saw the country's five- and 10-year borrowing costs fall sharply.
There was also some relief Hurricane Sandy had passed New York and the damage caused was less than worst-case scenarios.
That saw the safe-haven yen give back all of its gains against the euro and Australian dollar. The euro climbed to 103.12 yen, bouncing back from a two-week low of 102.18. The Aussie dollar edged up to 82.43 yen after a dip to one-week lows of 82.16.
Against the dollar, the single currency was at $1.2966 , having again found good support just below $1.2900. That helped keep the single currency well within its $1.2800/$1.3200 range seen since mid-September.
Euro zone finance ministers will hold a conference call later today to discuss progress in negotiations of Greece's bailout, but are not expected to make any decisions yet.
Investors again favoured the Australian dollar, driving it back towards the top-end of its $1.0200/$1.0400 range. It was last at $1.0366.
Late on Tuesday, Australia's central bank deputy governor said the local currency was not fundamentally overvalued and set a very high bar for intervening to weaken it.
``This attitude of allowing the currency to freely float is in stark contrast to countries in Asia where there is increasing vigilance over the pace of currency appreciation,'' analysts at BNP Paribas wrote in a client note.
``Ultimately, should several EM countries intervene against inflows to slow the pace of FX appreciation, then the freely floating high-yield currencies (AUD, NZD, and CAD) could receive an additional layer of support.''