FOREX- Dollar rebounds against yen after sharp fall, BOJ concerns linger
* Dollar regains foothold after steep fall on lack of BOJ action
* Aussie steadies after touching near 3-year low
* Euro holds near highest level since late February
By Sophie Knight
TOKYO, June 12 (Reuters) - The dollar clawed back against the yen on Wednesday after suffering its biggest drop in three years the previous day when investors unwound bearish yen bets as the Bank of Japan held off from introducing fresh steps to curb bond market volatility.
The dollar bounced 0.8 percent from late U.S. levels to 96.77 yen after sinking as low as 95.60 in the previous session and closing down 2.7 percent to chalk up its biggest one-day fall since May 2010, according to the EBS platform.
The euro followed a similar trajectory, reclaiming 0.7 percent to 128.76 yen after losing 2.4 percent to approach its two-month low of 126.19 struck on Friday.
Yen shorts were squeezed after the BOJ disappointed investors hoping for an extension in the maximum duration of its fixed-rate loans - which would be similar to the European Central Bank's long term refinancing operation - to try and quell volatility in the bond market.
"I think 60 percent of the market were expecting something out of the BOJ. Then overseas stocks sold off and I think the risk-off atmosphere helped the yen's gain," said Kenichi Asada, manager of forex at Trust & Custody Services Bank.
"At the moment exporters' dollar purchases have shrunk quite a bit, so it looks like it will be difficult for the dollar/yen to head higher again," he added.
Analysts say the technical support may keep the dollar-yen above 95 for now, however. The base of its daily Ichimoku cloud lay at 95.53 on Wednesday, a level the pair hasn't closed below since mid-October.
The yen had slid 20 percent against the dollar between mid-November and May, underpinned by Japanese Prime Minister Shinzo Abe's sweeping policies to stimulate the economy and spurred on by the BOJ's audacious easing programme launched in April under new governor Haruhiko Kuroda.
But tumult in the Japanese bond market has raised worries that it could undercut the BOJ's ultra-easy stance and damage the government's campaign to revive the world's third-biggest economy.
"Abe said that in the beginning it was important to raise expectations, and that's what pulled up stocks," said Yoh Nihei, senior FX market analyst at Citibank in Tokyo.
"But as Nikkei futures approach pre-Kuroda levels, investors and particularly hedge funds seem more doubtful of Abenomics," he said. The Japanese benchmark hit an intraday low of 12,994.08 on Wednesday, dancing closer to 12,362.20, its level a day before the BOJ overhauled its policy. It closed at 13,298.32.
The Nikkei's tumble in recent weeks has strengthened the yen as traders adjust their currency hedges on Japanese shares, while the dollar has been weakened by market players paring back long bets on the greenback as an imminent tapering of the U.S. Federal Reserve's easing programme appeared less likely.
The dollar index added 0.2 percent on Wednesday to 81.273 after slumping in the previous session to 81.034, its lowest in nearly four months as long bets on the greenback were unwound.
The Antipodean currencies continued to get hammered after seeing modest gains earlier in the session. The Australian dollar slipped 0.2 percent to $0.9421 after plumbing a trough of 0.9325 on Tuesday, its lowest since September 2010.
"As the euro calms down then I think it's difficult to see people being attracted towards the Aussie, even though if you compare fundamentals it's clearly better. I think having no fresh reasons to buy is taken as a negative factor at the moment," said Asada of Trust & Custody Services Bank.
The New Zealand dollar also lost 0.1 percent to reach $0.7868 after grazing 0.7761 on Tuesday, its lowest since June 2012.
The euro edged down 0.1 percent to $1.3295 after touching a 3-1/2 month high of $1.3317 on Tuesday. The unwinding of long bets in commodity and emerging market currencies has apparently sparked a return to the euro now that Italian and Spanish bond yields have come off dangerous highs.
Later on Wednesday Germany's Constitutional Court will finish a two-day hearing on the legality of the European Central Bank bond-buying scheme that has defused the euro zone debt crisis.
The euro gained a day earlier after European Central Bank executive board member Joerg Asmussen told the court that the ECB's bond-buying scheme must be unlimited to show the ECB is serious about defending price stability but is in effect limited by its focus on shorter maturity bonds.
- WTO overcomes last minute hitch to reach its first global trade deal
- Colorado baker discriminated by denying gay couple wedding cake: judge
- Flights delayed as air pollution hits record in Shanghai
- U.S. freeze shows no sign of weekend melt after deadly storm
- Australia foreign minister downplays China air defense zone tension in visit