* Yen's rebound can extend further, but weaker trend intact
* Dollar drops 2 percent this week vs yen
* Euro posts 1st weekly gain in three vs dollar after German Ifo
By Wanfeng Zhou
NEW YORK, May 24 The dollar posted its worst week against the yen in a year on Friday as volatility in stocks and uncertainty about the outlook for U.S. monetary policy spurred investors to pare back bets against the Japanese currency.
Some analysts also believed the yen's recent selloff may have gone too far, two fast. The dollar has risen 16 percent so far this year to a 4-1/2 year high above 103 yen, while the euro has gained 14 percent.
"We think that the dollar/yen has probably overshot its fair value," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The near-term outlook is for mean reversion back to the 100 level."
The yen's rebound began on Thursday, a day after Federal Reserve Chairman Ben Bernanke sparked speculation that the U.S. central bank may be close to reducing its bond-buying program. Global equities tumbled and safe-haven currencies rallied.
The dollar fell 0.9 percent to 101.09 yen, after hitting a session low of 100.68, according to Reuters data, a two-week low.
For the week, the dollar lost 2 percent - the worst weekly performance since the start of June 2012.
Woolfolk said the yen also rallied as some investors booked profits on their bets against the Japanese currency ahead of the long U.S. Memorial Day weekend.
Japan's Nikkei stock average, after swinging from gains of 3.6 percent to losses of 3.5 percent, ended Friday's session up 0.9 percent. On Thursday, the Nikkei fell as much as 7.3 percent, its biggest one-day drop in two years.
Analysts said any rebound in the yen will likely be temporary on expectations of further easing in Japan. Hopes the Fed may be winding down its stimulus later this year could add to the dollar's momentum.
"The yen-weakening trend will remain. But there will be a correction in the short term, and it could be a sizeable one," said Ian Stannard, Morgan Stanley head of European FX strategy, in London.
The euro fell 1 percent to 130.72 yen, after hitting a session low of 130.10 yen.
Against the dollar, the euro dipped 0.1 percent to $1.2928 .
Earlier, the euro climbed after the monthly German Ifo survey showed business morale improved far more than expected in May, suggesting Europe's largest economy is picking up.
The Ifo data came as a relief to market participants after recent comments from European Central Bank officials fueled expectations that the central bank could lower interest rates further, even potentially cutting the deposit rate to negative.
But the dollar rebounded against the euro after better-than-expected U.S. durable goods data for April eased investor concerns about the U.S. economy. .
For the week, the euro gained 0.7 percent, its first weekly rise in three weeks.
The dollar fell 0.7 percent against the Swiss franc to 0.9615 franc, another safe haven that has recently tracked the yen lower. The euro dropped 0.8 percent to 1.2432 francs .
Against a basket of currencies, the dollar index slipped 0.2 percent to 83.645.
Currency speculators increased bets in favor of the U.S. dollar in the latest week to the highest since at least June 2008, according to data from the Commodity Futures Trading Commission released on Friday.
The value of the dollar's net-long position rose to $41.0 billion in the week ended May 21, from long bets of $32.27 billion the previous week. The total was the highest value of net long contracts on the U.S. dollar since Reuters started tracking the greenback's overall positioning in the speculative market in mid-June 2008.