FOREX-Nikkei slump lifts yen against dollar
* Dollar falls against yen after slide in equities
* Japanese data on capital flows also support yen
* Markets waver on Fed QE tapering view
LONDON, May 30 (Reuters) - The dollar fell against yen on Thursday after a slide in equities pushed market participants to opt for the safety of the yen and unwind their bets for a stronger dollar.
Japanese shares tumbled, losing more than 5 percent on the day, while European stocks lost nearly 2 percent on Wednesday and this helped support currencies like the yen and Swiss franc which benefit in times of financial uncertainty.
The dollar was down 0.5 percent on the day against the yen at 100.68, having hit an intra-day low of 100.46, which was its lowest since May 9.
Traders cited Japanese bids around 100.50 yen and reported large option expiries at 100 yen which could keep the currency pinned to that level.
"We are seeing today a natural and healthy correction in perhaps overbought equity and currency markets and that is having a knock-on impact on the dollar in general, it is weaker against a broad range of currencies," said Paul Robson, currency strategist at RBS.
The dollar index dropped 0.3 percent to 83.431 on Thursday, pulling away from a 3-year high of 84.498 hit on May 23.
Robson said the dollar's uptrend against the yen was still intact and forecasts the U.S. currency at 110 yen by year-end.
Strategists said the yen was also impacted because when foreign investors buy Japanese equities they hedge this investment by buying dollars against the yen. When the Nikkei falls they have to sell dollar/yen in order to unwind those hedges.
"It may seem illogical (for the forex market to follow the Nikkei), but a weaker yen led to optimism for stocks before, so right now the Nikkei's retreat has initiated a fall in the dollar-yen too," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
Some market participants had expected the Bank of Japan's aggressive easing would pressure Japanese bond yields and send Japanese investors in search of higher yields abroad.
Finance ministry data on Thursday, however, showed they sold 1.117 trillion yen ($11.1 billion) worth of foreign bonds last week, the second straight week of net selling, as they resumed the repatriation of overseas investments, which is yen-positive.
"The flows data just gave people another reason to lighten up on their long speculative dollar/yen positions... perhaps people are just concerned the outflows from Japan aren't coming as quickly as they had hoped," RBS' Robson said.
The dollar had slipped 1.3 percent on Wednesday against the yen, its largest daily loss in a month, after U.S. Treasury yields toppled from a 13-month high on doubts on whether the U.S. Federal Reserve will wind down its stimulus.
Fed chief Ben Bernanke said last week that a decision on whether to scale back the central bank's current $85 billion-a-month in asset purchases could come at one of the Fed's "next few meetings" depending on economic data.
But most strategists expect rising prospects of QE tapering to lift Treasury yields and bolster the greenback in coming months.
Against a weaker dollar, the euro was up 0.2 percent at $1.2960. Business and consumer sentiment data at 0900 GMT will provide hints as to whether the European Central Bank will cut rates.