* Dollar, yen rise as recession fears fade
* But low US yields still cap greenback
* Risk aversion returns, yuan and Australian dollar down
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Updates prices)
By Tom Finn
LONDON, Dec 6 (Reuters) - The dollar and the yen rose on Thursday after the arrest in Canada of a top executive of Chinese tech giant Huawei prompted fears of a flare-up in U.S.-China trade tensions.
The dollar has been under pressure over concern about a possible U.S. recession.
But the arrest of Huawei Technologies Co Ltd's chief financial officer increased safe-haven demand for the currency as doubts emerged over a truce on trade struck days ago between Presidents Donald Trump and Xi Jinping.
"Political quarrels outside the trade arena could jeopardise the success of the trade talks... This is causing risk aversion to rise again," said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.
As investors grew cautious and pulled back from riskier assets the Japanese yen, often sought in times of market unrest, rose 0.4 percent.
Sharp losses in technology shares pulled down benchmark stock indexes in China as the Chinese yuan slid 0.7 percent against the dollar to 6.9037, its biggest daily fall since August.
The Australian dollar also fell more than one percent, demonstrating its vulnerability to a worsening trade conflict due to its export-oriented economy.
Against a basket of six rivals, the dollar edged up 0.2 percent to 97.202. The currency has fallen 0.4 percent this week but is only half a percent off a 17-month peak of 97.693 touched on Nov. 12.
The dollar fell broadly earlier this week after a thaw in trade tensions between Washington and Beijing.
It has also been pressured by worrisome signs in U.S. bond markets about economic growth and signals from the Federal Reserve that a slowdown in the pace of interest rate hikes may be coming.
"The dollar could remain under pressure until this month's Fed meeting when the market will see the Fed's stance on policy and the economy," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
"The recent reaction to the U.S. yield curve inversion appears a little hysterical, but the dollar will not be given the all clear sign until the Fed meeting is hurdled."
Fed policymakers are still widely expected to raise interest rates again at their Dec 18-19 meeting, but the market focus is on how many rate hikes will follow in 2019.
The Canadian dollar fell as much as 0.6 percent to $1.3437, while the Norwegian crown slid 0.7 percent against the dollar, pulled down by fraying market sentiment and weak oil prices.
The yen rose to 112.645 against the dollar and made strides against most of its peers.
The euro was slightly lower at $1.1328 after retreating from this week's high of $1.1419 scaled on Tuesday. (Additional reporting by Shinichi Saoshiro Editing by Peter Graff and Jon Boyle)