FOREX-Dollar shaky ahead of US jobs report, Fed uncertainty
* Dollar still under pressure after biggest 1-day fall in 3 yrs vs yen
* Risk is for dollar to snap back on strong payrolls data
* Fed stimulus uncertainty buffets trade
* Aussie resumes fall after bouncing in previous session
By Sophie Knight
TOKYO, June 7 (Reuters) - The U.S. dollar was on the back foot in Asia on Friday after suffering its biggest one-day decline in three years against the yen as market players unwound their bullish bets on the greenback ahead of a closely watched U.S. jobs report.
After falling as much as 3 percent to a seven-week trough of 95.90 yen on Thursday, the greenback was last trading at 96.85, flat on late U.S. levels.
The dollar pared earlier deeper losses after Japan's Government Pension Investment Fund (GPIF) said it would increase its holdings of riskier assets such as foreign equities, while cutting down on domestic government bonds.
The GPIF's decision could support sentiment in Japanese equities, which have recently come under heavy selling pressure with the benchmark Nikkei stock average falling sharply on China growth worries and Fed stimulus jitters.
Dollar-yen has been tracking the Nikkei over its steep decline in the past two weeks as foreign investors pare back the hedges they had put in place for protection from the yen's slide between November and May.[ID: nL3N0EH2DF]
"Japanese exporters were hoping the dollar-yen would stay in a range between 95 to 100, so when it breaks 97 they panic a bit. They haven't hedged up to now so they're worried that it won't recover to this rate for a while," said Yoshio Takahashi, currency strategist at Barclays.
"There were a lot of yen shorts, which is why the yen took the brunt of the dollar's weakness," he added.
Traders said while there was no concrete trigger for the vicious selloff in the greenback overnight, the move flushed out some long USD positions ahead of the non-farm payrolls report due at 1230 GMT.
However, uncertainty over whether the U.S. Federal Reserve would wind back its $85 billion per month bond-buying programme this year kept currency traders on edge.
Just last month, investors had turned bullish on the dollar on the belief that upbeat data would prompt the Fed to reduce its stimulus in coming months.
But the dollar index has dived since hitting a nearly 3-year high of 84.498 on May 23 as some traders cut their dollar-longs after a mixed batch of recent economic reports raised concerns that Friday's jobs data will disappoint.
Against a basket of currencies, the dollar was last at 81.637 after reaching a three-month low of 81.077 on Thursday.
Barclays Capital analysts said the market seemed to be positioning for a weaker number of payroll increases than its own forecast of 175,000, against an average 170,000 expected by economists polled by Reuters.
"We think that an outturn close to our forecast could lead to broad USD strength, especially versus low-carry currencies."
Against the euro, the greenback steadied after losing 1.2 percent on Thursday to a three-month low of $1.3306. It was last at $1.3251, little changed from late New York levels.
Market participants said the euro's move was more driven by the dollar's weakness against the yen than the European Central Bank (ECB)'s widely expected decision to leave its benchmark rate at a record low 0.5 percent.
On Friday, the euro steadied against the yen at 128.48 after brushing a five-week low of 127.53 on Thursday.
The recent rise in the yen threatens to undermine the Bank of Japan's stimulus efforts, which have weakened the Japanese currency, helping exporters' overseas revenues up.
"Japanese exporters weren't selling forwards outright before because they expected too much; they wanted to see a higher (dollar) level above 100, like 105," said the director of a research firm who asked not to be identified.
"But the Ministry of Finance don't care about the level so much. They talked it up to 95 and then it got to 100," he said, adding the ministry would be happy enough if the dollar remained above 90.
Japanese government officials said on Friday that they were concerned about the sharpness of the yen's move but did not express any overt worries about the level of the currency.
"We are watching these moves, but this is not about intervention and I don't think we have to respond immediately," Finance Minister Taro Aso told a news conference.
The yen gained 0.9 percent against the Australian dollar to 91.40, after rising as high as 91.20, a level not seen since January 9.
The Aussie also resumed its recent slide after the U.S. dollar's broad weakness granted it a bounce from a 20-month low of $0.9435 on Thursday. On Friday it was back down 0.6 percent at $0.9504, within reach of its 2011 trough of $0.9388.