* Yen initially slips on Japan machinery orders plunge
* Yen pares losses as Asian stocks decline sharply
* Euro on back foot after Greece ratings downgrade
By Shinichi Saoshiro
TOKYO, Jan 15 (Reuters) - The yen inched up against the dollar and euro on Thursday as a plunge in Asian stock markets spurred risk aversion, paring earlier losses suffered on a record drop in Japan's machinery orders.
The yen fell briefly after government data showed Japanese core private-sector machinery orders, a key gauge of corporate capital spending, fell a record 16.2 percent in November from the previous month.
The yen crawled back, however, as Tokyo's Nikkei average plunged 4 percent after a steep fall on Wall Street the previous day
"The yen was forced down slightly on the poor machinery orders, but its downside is likely to be limited as the market focus is on stocks," said Masafumi Yamamoto, head of forex strategy Japan at Royal Bank of Scotland.
"The trend points towards the yen firming while stocks decline," Yamamoto said.
The dollar slipped 0.1 percent from late U.S. trade the previous day to 89.00 yen.
The euro fell 0.2 percent to 117.25 yen after touching a six-week low of 116.57 yen on trading platform EBS the previous day.
The yen, as well as the dollar, could be favoured against the euro in the longer run as prospects for the single currency continue to deteriorate, traders said.
The euro touched a one-month low against the dollar and a six-week trough versus the yen the previous day after ratings agency Standard & Poor's cut Greece's sovereign debt rating, heightening fears over the euro zone economy.
S&P has also warned Ireland, Spain and Portugal this month that their ratings are under threat from the global credit crisis.
Greece's rating downgrade was seen boosting the chances of the European Central Bank cutting interest rates at a policy meeting later in the day.
The ECB is also under pressure to reduce rates as a string of dismal indicators has increased the chances of recession worsening in the euro zone.
Data on Wednesday showed Germany's economy, the zone's largest, likely contracted 1.5-2.0 percent in the fourth quarter of 2008.
Market players said the euro zone's plight has taken centre stage, overshadowing poor fundamentals from other major economies such as the U.S. and Japan.
"The euro continues to be the main market theme ahead of the ECB rates decision," said a trader at a European bank.
"The focus has shifted to Europe as bad U.S. fundamentals are no longer news but something to be expected," the trader said.
The euro declined 0.1 percent to $1.3173. It hit a one-month low of $1.3093 on EBS the previous day despite data showing a steep drop in U.S. retail sales.
Analysts said since the consensus is for the ECB to reduce rates by 50 basis points to 2.0 percent later in the day, and some currency investors may show disappointment if the central bank does cut beyond the consensus.
The New Zealand dollar sank to a five-week low against the greenback on Thursday as sharp declines in the region's stock markets set off the latest round of risk aversion.
The kiwi dropped 1.1 percent to $0.5358 after hitting $0.5340, the lowest since Dec. 8.
The Australian dollar fell slightly against the dollar after Australian employment figures reinforced the case for more rate cuts. Data on Thursday showed Australian employment fell less than expected in December but a steep drop in full-time positions and a rise in the jobless rate herald weakness ahead.
The Aussie dipped 0.1 percent to $0.6604. (Editing by Michael Watson)