* Yen rises versus dollar, euro as Nikkei tumbles
* Worries Fed may taper QE, weak China PMI hit stocks
* Euro helped somewhat by PMI data, still vulnerable
* Aussie hit hard by weak China data, fall in commodities
NEW YORK, May 23 The yen advanced sharply
against the dollar and the euro on Thursday after a slide in
stocks sparked by a drop in Chinese factory activity prompted a
rush for the safe-haven Japanese currency .
China's factory activity shrank for the first time in seven
months in May as new orders fell, a preliminary manufacturing
survey showed, entrenching fears that its economic recovery has
stalled and that a sharper cooldown may be imminent.
Concerns U.S. monetary stimulus could be scaled back, after
testimony on Wednesday by Federal Reserve Chairman Ben Bernanke,
added to investor caution and drove Japan's Nikkei share index
down 7.3 percent, its biggest one-day drop in two years.
"What we saw was a massive sell off in Japanese equities
and a pull back in risk with the yen being the biggest
beneficiary," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington, D.C., but "a lot of
the drivers are still in place and we are likely to see the
dollar push higher and the yen push lower."
At the session peak, the yen rose more than 2 percent
against the dollar and the euro, which both lost 1 percent
against the Swiss franc , also seen as a safe
The yen hit a two-week high of 100.82 to the dollar,
reversing a slide to a 4-1/2 year low of 103.73 yen on Wednesday
after Bernanke told Congress the Fed could "in the next few
meetings take a step down" in its bond buying.
The dollar was last 101.68, down 1.4 percent on the day.
With the dollar up about 17 percent against the yen this
year, analysts said the Chinese data and the drop in stocks
provided the excuse for a profit-taking correction.
"The market got overextended in terms of bullishness on
dollar/yen yesterday after the Bernanke comments. We now have
seen a correction and some uncertainty in the JGB (Japanese
government bond) markets," said Jeremy Stretch head of currency
strategy at CIBC World Markets in London.
"The market was somewhat overbought and this prompted a
fairly aggressive reaction (in dollar/yen) which was overlayed
by a pretty seismic move in equities as well."
Analysts said the dollar could drop further against the yen
if stocks continued to decline. But they expected the trend of
yen weakness and dollar strength to remain given aggressive
easing in Japan and the prospect of tighter U.S. policy.
"The correction (in dollar/yen) has the potential to go
further ... But there is no risk of a dramatic fall and any move
below 100 should be brief," said Niels Christensen, currency
strategist at Nordea in Copenhagen.
Some traders focused on Bernanke's caveats that the central
bank would need to see more improvements in the economy before
reducing stimulus, even though Fed minutes showed some
policymakers were willing to cut bond buying as early as June.
The euro slid to a two-week low of 129.94 yen,
having touched a 3 1/2-year peak of 133.77 yen on Wednesday. It
was last at 131.19, down 1.1 percent.
The single currency was up 0.3 percent at $1.2895,
helped slightly by data showing the downturn across euro zone
businesses eased slightly this month.
But the euro zone PMI business survey numbers pointed to
another contraction in the euro zone in the second quarter.
Analysts expected the euro to stay weak against the dollar given
concerns the Fed will taper its asset-purchase program while the
European Central Bank could ease monetary policy further.
A sharp slide in commodity prices hurt the Australian dollar
, along with the Chinese data. China is Australia's
biggest export market.
The Aussie last traded down 0.1 percent at $0.9686,
recovering from $0.9592, its lowest in nearly a year.