* Currency markets watching Nikkei for cues
* Yen downside may be limited if Nikkei falls further
* Aussie dollar still struggling, 2012 nadir in focus
By Ian Chua
SYDNEY, May 28 The yen gave up a bit of ground
early in Asia on Tuesday but clung to most of its recent gains
with wary investors keeping an eye on the Nikkei as further
declines in Tokyo stocks would likely underpin the Japanese
Investors had cut one-way bets against the yen in the past
few sessions after a 7.3 percent slide in the Nikkei and
subsequent extreme volatility jolted yen-bears to swiftly lock
That saw both the dollar and euro fall to two-week lows. The
greenback was last at 101.15 yen, up a modest 0.2 percent
on the day, but still near the low of 100.66 plumbed on Friday.
The euro fetched 130.79 yen, trying to pull up
from Thursday's trough around 129.95. Trading overnight was
uninspiring with UK and U.S. holidays keeping the major
currencies in slim trading ranges.
Growing worries that the Federal Reserve might scale back
its massive stimulus programme and more evidence of slower
growth in China had given many investors a reality check.
"Looking forward to today, Nikkei movements continue to be
the focus," JPMorgan strategists Anna Hibino and Thomas Anthonj
wrote in a client note.
"With the Nikkei and USD/JPY maintaining this relationship,
if the Nikkei trades sluggishly today, this would likely pull
USD/JPY lower as well."
The euro, meanwhile, has been struggling to reclaim $1.3000
given no new flare-up of euro zone concerns. It was
little changed at $1.2931, having steadily recovered from
this month's low of $1.2796.
Investors have clearly turned bearish on the once
high-flying Australian dollar, with the market still betting on
yet more interest rate cuts given slower growth in the country's
single biggest export market, China.
The Aussie eased 0.1 percent to $0.9626, staying
close to the 2012 nadir of $0.9581. A break there would take it
back to lows not seen since October 2011.
It has fallen 9 percent from a high of $1.0583 set just last
Some analysts suspect the slide in the Aussie is overdone.
Analysts at St. George believe the Chinese recovery will be
sustained and the notion that the Fed could start unwinding its
bond purchases within a few months is premature.
"This would suggest the AUD should not drift too far away
from parity for too long," said Janu Chan, an economist at St
"Our forecast of $1.02 by end 2013 and $1.00 by end 2014
reflects our view of a later pullback in stimulus from the
Federal Reserve, the relative strength of the Australian economy
and positive prospects for China."
There is little in the way of market moving economic news
out of Asia on Tuesday, leaving the focus squarely on the