FOREX-Euro and dollar fall against the yen; BOJ, ECB ahead
* Dollar pressured against the yen, support at Jan. 1 low
* Euro to remain firm vs dollar ahead of ECB meeting
NEW YORK Jan 8 (Reuters) - The dollar and the euro fell against the yen on Tuesday as more investors bet recent gains were too far, too fast even with current expectations for looser monetary policy in Japan.
Analysts and traders said the yen has scope to rebound further in coming days, although gains will be capped by the expectations that the Bank of Japan will ease monetary policy.
The dollar has rallied against the yen since Japan's newly elected government said it would push the Bank of Japan, headed by Governor Masaaki Shirakawa, to adopt more forceful monetary stimulus measures.
Earlier on Tuesday the euro gained against the yen after Japanese Finance Minister Taro Aso said the government would buy bonds issued by the European Stability Mechanism (ESM), the euro zone's permanent bailout fund.
"The FX focus has been on plans for Japanese stimulus, rumored to be $228 billion, and the finance minister's comment that he favors buying foreign bonds, including the ESM, with FX reserves," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
The dollar fell to a session low of 86.95 yen after a rally of nearly 12 percent in recent months that saw the dollar touch its highest level since July 2010. It was last down 0.8 percent at 87.07 yen, with solid support expected at around the low hit on Jan. 1.
Analysts said investors were nervous of pushing the yen too much lower due to the risk the BOJ may not opt for aggressive stimulus as early as its next meeting on Jan. 21-22, with a focus on Shirakawa's tenure at the helm of the Japanese central bank.
"We still have Shirakawa, who is not leaving until end of March, so there is a risk of disappointment," said Chris Turner, head of FX strategy at ING in London.
The euro was last down 1.2 percent on the day at 113.76 yen, having earlier hit a session high of 115.21 yen after Aso's comments, though that was still below an 18-month high set on Jan. 2.
"Japan's comments helped euro and dollar/yen a bit higher at first. But then everyone realized they are just going to use current reserves so there should actually be no impact," said Geoff Kendrick, FX strategist at Nomura, of the market reaction to the plans to buy ESM bonds.
The euro was down 0.4 percent on the day against the dollar at $1.3064, less than a cent above a three-week low set on Friday. Some $4.05 billion in euros had changed hands through the global session using Reuters Dealing data.
Markets are positioned for the European Central Bank to keep rates on hold when it meets this Thursday. The single currency was volatile on market talk that France's sovereign debt rating would be imminently downgraded but impact was fleeting. A French Finance Ministry spokeswoman on her Twitter feed called the rumors "unfounded and false."
With no significant economic data due on Tuesday, the euro was seen staying in a range ahead of the ECB meeting and Spanish and Italian bond auctions toward the end of the week.
However, any hint by ECB policymakers about future interest rate cuts could undermine the currency.
"Markets have backed away from peripheral issues in Europe for now, and unless we start to get broader concerns, euro/dollar will continue to trade sideways for now," said Geoff Kendrick, FX strategist at Nomura in London.