* Some traders see Nikkei's adjustments already over
* Dollar buoyed by expectations Fed may scale down QE
* Aussie near 1-year low
By Hideyuki Sano
TOKYO, May 24 The dollar recovered from two-week lows against the yen on Friday, as Japanese shares rebounded from the previous day's 7.3-percent plunge, which had spurred profit-taking in the lucrative yen-selling trade.
The massive fall in shares caught markets by surprise but traders are starting to conclude that it was a merely a correction, and it cannot be denied the Bank of Japan's strong stimulus will weaken the yen over the long term.
"Adjustments are an important part of the market. You can't have a one-way move forever. So yesterday's big adjustment was necessary, I think. But if the Nikkei rebounds, it will become easier to buy the dollar," said Bart Wakabayashi, head of forex at State Street Global Markets.
The Nikkei rose 2.7 percent in early Friday trade. Overnight on Wall Street, U.S. stocks slipped but finished sharply off their session lows.
The dollar tacked on 0.3 percent on Friday to 102.28 yen , rebounding sharply after having fallen to a two-week low of 100.83 yen on Thursday.
It wasn't far off a 4-1/2-year high of 103.74 yen hit earlier this week.
The yen has dropped sharply this year and the Nikkei has surged around 45 percent on the back of Japanese Prime Minister Shinzo Abe's prescription of aggressive monetary and fiscal stimulus.
"There's no change in the accommodative monetary environment. Correction may be already over," said Hideki Amikura, manager of forex at Nomura Trust Bank.
Currency traders are likely to keep an eye on Japanese shares for now, given the high inverse correlation between the yen and Japanese shares in recent months.
Junya Tanase, chief currency strategist at JPMorgan Chase, said the dollar fell about three percent on average in four instances during the bull market of 2003-2007 when Japanese shares declined more than four percent.
"Based on that average, the Nikkei could need about 20 sessions to recover the losses and the dollar/yen could fall around three percent during that process," Tanase said.
"But even if the adjustment phase drags on, the dollar/yen is unlikely to fall much beyond 100 yen," he added.
Analysts also note that the dollar is generally being supported by expectations that the U.S. Federal Reserve is inching towards tapering its bond buying after Chairman Ben Bernanke said on Wednesday suggested this could happen in one of the next few policy meetings.
"The battleground has shifted to the U.S. economy. The market will scrutinise whether the U.S. economy is strong enough for the Fed to taper its bond buying," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.
The dollar index, which measures the currency's value against a basket of six other major currencies, stood at 83.88 , up 0.1 percent on the day and near a three-year high of 84.498 hit on Thursday.
The euro eased 0.1 percent to $1.2917, though it kept some distance from a six-week low of $1.2796 hit last week.
The growing view that the Fed will take its foot off the bond-buying scheme pedal is hurting the Australian dollar, which has been a magnet for funds looking for higher yields.
The Aussie fell 0.7 percent to $0.9667, edging closer to a one-year low of $0.9593 hit on Thursday.
The Australian unit was also pressured by China's factory activity for May, which shrank for the first time in seven months, deepening fears that the recovery in the world's second-largest economy has stalled.