FOREX-Yen sell-off pauses but on track for worst week since mid-Feb
* Dollar/yen off highs, option barrier at 81.50 cited
* Dollar heads for best week vs yen since late June
* Euro under pressure as worries about Greece weigh
* ECB's Weidmann says Greece would have to earn haircut
By Julie Haviv
NEW YORK, Nov 16 (Reuters) - The yen paused from a two-day pummeling against the dollar on Friday but remained on track for its worst weekly loss since mid-February on expectations of aggressive monetary easing from the Bank of Japan.
The dollar has strengthened more than 2 percent against the yen over the past two sessions, its biggest two-day rally since October 2011, after Japanese Prime Minister Yoshihiko Noda paved the way for a snap election on Dec. 16. The lower house of parliament was dissolved on Friday.
Shinzo Abe, leader of the main opposition Liberal Democratic Party and seen as likely to be Japan's next leader, called on Thursday for the country's central bank to adopt interest rates of zero or below to spur lending.
The dollar last traded flat against the yen at 81.12 yen , with traders citing a large options barrier at 81.50 yen and stop-loss orders placed above it.
It hit a 6-1/2-month high of 81.45 yen on Thursday on Reuters data and some believe it could rise towards 82 yen if the Bank of Japan, which holds a policy meeting next week, indicates it could ease further.
"We have had quite a big move in the last couple of days so we've probably seen a bulk of the early moves. The direction will continue trending higher in coming months," said Colin Asher, senior economist at Mizuho Corporate Bank.
"Some investors with short-term horizons are probably looking to take profits after such big moves and some of the longer-term investors are happy to sit on their positions on the expectations that the rise will continue."
The yen, seen as a safe haven in times of uncertainty, could pare losses should concerns about the U.S. "fiscal cliff" mount and euro zone debt concerns deepen. But, the U.S. dollar should also benefit due to its safe-haven status.
"The basic driver is still the interest rate differential between the dollar and yen, which is very narrow, and we have to wait for what happens after the elections," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.
The dollar/yen pair traditionally has a strong correlation with the spread between two-year U.S. Treasuries and Japanese government bond yields.
Short-dated Japanese bond yields have fallen sharply this week but so have U.S. Treasury yields on expectations of Federal Reserve easing and safe-haven flows into Treasuries due to worries about the U.S. fiscal cliff.
If Congress and the White House cannot reach a debt and deficit reduction deal by the end of the year it will unleash massive spending cuts and tax increases that has the potential to tip the U.S. economy back into recession.
A protracted impasse in U.S. talks to avoid some of the $600 billion of spending cuts and tax hikes that kick in early in the new year could prompt some investors to seek shelter in the liquidity of the dollar.
A dispute among Greece's international lenders and weak economic data out of the euro zone have done little to lift market sentiment towards the euro.
Any new haircut of Greece's debt should only come as a reward for Athens implementing the reforms it has signed up to, European Central Bank Governing Council member Jens Weidmann said on Friday.
Weidmann's fellow Governing Council member Luc Coene on Thursday became the first ECB policymaker to say that another haircut on part of Greece's debt was probable.
The euro was down 0.4 percent at 103.32 yen, but still on course for its biggest weekly gains since early October.
Against the dollar, the euro was down 0.4 percent at $1.2732 , though holding above Tuesday's two-month low of $1.2660. Resistance is seen at its 200-day moving average of $1.2810.