* Yen underpinned as stock markets volatile
* Drop in Nikkei futures accelerates yen gains
* Options market shows shift for yen calls
* Investors focus on Federal Reserve meeting next week
By Julie Haviv
New York, June 14 The yen rose for a fourth session against the dollar Friday, hitting its strongest level since the Bank of Japan embarked on aggressive economic stimulus in early April, as volatile markets triggered an unwinding of bets that the currency would weaken.
The yen's gains accelerated in late morning New York trading as Japanese equities futures, which dollar/yen have been closely correlated with in recent weeks, traded more than 1 percent lower.
Japan's Nikkei index closed 1.9 percent higher while European shares provisionally closed up 0.2 percent.
A survey showing U.S. consumer sentiment retreated this month after reaching its highest in nearly six years in May favored the safe-haven yen earlier in the session.
Also on Friday, U.S. data showed producer prices rose more than expected in May, even as underlying inflation pressures remained muted, which could argue against an early scaling back of monetary stimulus by the Federal Reserve.
Uncertainty over the longevity of global monetary policy has rattled markets in recent weeks, with fears rising further this week when the Bank of Japan decided to hold policy steady.
"The yen has proved to be investors' go-to safe haven to ride out global stock market volatility," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C..
"The uncertainty has prompted investors to exit recently overcrowded plays like betting on the dollar and Japan's Nikkei stock index and against the yen," he said. "With that play now in reverse, the yen has steadily been squeezed higher."
The dollar last traded down 0.8 percent at 94.64 yen, not far from the global session low of 94.42 yen, its lowest since the BoJ announced on April 4 that it would buy $1.4 trillion in bonds to stimulate its economy.
The euro was last down 1.0 percent at 126.24 yen, just above the session low of 125.99 yen.
"Until investors get a better handle on the future course for monetary policy in the U.S., Japan and Europe - which could come as soon as next week - the yen should be poised for a continued grind higher," Manimbo said.
Dollar/yen has moved in step with the Nikkei in recent weeks as investors unravel the sell-yen, buy-stocks trade that dominated between November and May. The fall in stocks has prompted investors to pare the dollar hedges put in place to protect them from a weakening yen.
The drop has seen implied volatility jump, while three-month risk reversals, a gauge of relative demand for put or call options, were flipping towards yen calls, or bets the currency will gain.
Commerzbank head of FX research Ulrich Leuchtmann said the dollar was unlikely to make much headway against the yen, until there was more clarity about central banks' monetary policies.
"The risk-off (sentiment) we see is mainly due to markets being unsure about the monetary policy of the future ... this is good reason to be cautious of risky assets and to look into safe havens like the yen," Leuchtmann said.
The current bout of market turbulence started when investors began worrying that the Federal Reserve will start scaling back its stimulus program earlier than expected this year.
The Fed next meets on June 18-19, and investors expect more clarity from Chairman Ben Bernanke on how much longer the Fed will continue its accommodative policy. Some expect assurance that the Fed will maintain its stimulus measures and that it is in no hurry to tighten policy yet.
"Conviction that the Fed could taper its asset purchases as early as next week appears to be fading," Brown Brothers Harriman said in a research note.
"Still the Fed's new forecasts will be scrutinized for any tells that the Fed is anticipating a quickening of the pace of recovery, which would in turn strengthen ideas of tapering in September," the firm said.
The dollar index was flat at 80.734, recovering from a four-month low of 80.500 on Thursday.
After hitting a four-month high of $1.3390 on Thursday, the euro traded 0.3 percent lower to $1.3338, according to Reuters data.