FOREX-Fragile yen hits 3-1/2 year low vs dollar
* Yen steadies after hitting 3-1/2 year trough vs dollar
* Hints of early BOJ easing prompt fresh yen selling
* Euro soft vs broadly stronger U.S. currency
By Nia Williams
LONDON, March 12 (Reuters) - The yen hit a 3-1/2 year low against the dollar on Tuesday after signs that Bank of Japan monetary stimulus could come sooner than previously expected.
It recovered in later trade as some traders took profits, but remained vulnerable.
The euro also struggled against a broadly firmer dollar, weighed down by political uncertainty in Italy and the contrast between a brightening U.S. economic outlook and faltering growth in the euro zone.
The latest bout of yen selling was spurred by a report in the Nikkei business daily that the nominee for Bank of Japan governor, Haruhiko Kuroda, hinted he may launch new monetary easing steps soon after he takes office next week, rather than wait for his first policy meeting on April 3-4.
The dollar climbed as high as 96.71 yen, its highest level since August 2009, before giving up some ground to last trade down 0.1 percent on the day at 96.16 yen.
This latest lurch higher in the dollar came after a stronger-than-expected U.S. jobs report on Friday prompted speculation the Federal Reserve could back off stimulus measures sooner than anticipated.
"We have this theme of a better dollar that is being recognised across the board. Overnight there were comments from Japan which again sounded dovish .... what's different this week is the stronger dollar tone as well as the (weaker) yen tone," said Jane Foley, senior FX strategist at Rabobank.
The dollar index rose 0.2 percent on the day to 82.734, within sight of Friday's seven-month high of 82.924.
Minutes from the BOJ's February meeting and comments in favour of looser policy from the two deputy governor nominees also pushed the yen lower.
It hit a 4-1/2 year trough against the Australian dollar of 99.55 yen.
The moves came against a backdrop of optimism on the U.S. economy, with the Dow closing at a record high, while Wall Street's "fear gauge", the CBOE Volatility Index, hit its lowest since February 2007.
Positive risk sentiment, fuelled by Friday's U.S. jobs data, also lifted yields on U.S. Treasuries, which tend to have strong positive correlation with dollar/yen as higher yields are thought to attract more bond investments in that currency.
"Dollar/yen was already very bid overnight, consistent with the backup in U.S. Treasury yields. The Nikkei story has just given it a bit of a kick," said Sue Trinh, senior currency strategist at RBC in Hong Kong.
"Speculation of an inter-meeting easing is probably going to be a focus....if he (Kuroda) were to do so, it's more symbolic and a signal to markets that he does mean business."
The euro traded down 0.4 percent on the day at 125.02 yen , around 2 percent below a 34-month high of 127.71 reached last month.
Against the dollar, the single currency fell 0.3 percent to $1.3004, nearing Friday's three-month low of $1.2955. Traders reported an options barrier at $1.30 and stop loss orders around $1.2985-90.
The euro is seen vulnerable to more selling as the austerity-hit euro zone's economy is expected to face an uphill battle to recover from recession. Rabobank's Foley said she expected the euro to slip to $1.28 in three months time.
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