FOREX-Yen sell-off pauses, still vulnerable to easing bets
* 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
LONDON, Nov 16 (Reuters) - A sell-off in the yen paused on Friday but the Japanese currency remained on course for its biggest weekly loss versus the dollar since late June on expectations of aggressive monetary easing.
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 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 was flat against the yen at 81.18 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 81.46 yen on Thursday on trading platform EBS and some said it could rise towards 82 yen if the Bank of Japan, which holds a policy meeting next week, indicated it could ease further.
Some analysts said while the dollar could continue to grind higher, further sharp rises were less likely in the near term.
"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."
Some strategists said the yen's current weakness may not last if the BoJ disappoints next week by not laying the ground for further easing.
The yen, which is seen as a safe haven in times of uncertainty, could also gain if worries about the U.S. fiscal cliff mount and euro zone debt concerns deepen.
"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' of spending cuts and tax rises scheduled for the turn of the year.
A dispute among Greece's international lenders and weak economic data out of the euro zone has done little to lift market sentiment towards the euro.
The euro was down 0.4 percent at 103.36 yen, but on course for its biggest weekly gains since early October.
Against the dollar, the euro was down 0.3 percent at 1.2735 , though holding above Tuesday's two-month low of $1.2661. Resistance is seen at its 200-day moving average of $1.2810.
A protracted impasse in U.S. talks to avoid some of the $600 billion of spending cuts and tax hikes that kick in in January could prompt some investors seek shelter in the liquidity of the dollar.
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