* Dollar/yen nears 7-year high of 115.60
* Nikkei hits 7-year high, risk appetite improves
* Bullish dollar cuts short breather enjoyed by Aussie (Updates to reflect changes in currency levels)
By Shinichi Saoshiro and Ian Chua
TOKYO/SYDNEY, Nov 11 (Reuters) - The dollar rose towards a seven-year high versus the yen on Tuesday as a surge in Tokyo stocks amid an increase in risk appetite dimmed the appeal of the Japanese currency.
Japan’s Nikkei climbed 2.1 percent to a seven-year high as speculators saw a possibility Prime Minister Shinzo Abe could postpone a planned sales tax hike. Higher risk appetite tends to favour the dollar by pushing U.S. bond yields higher.
The dollar was up 0.4 percent at 115.325 yen, coming within reach of a seven-year peak of 115.60 scaled last week.
The greenback had already made significant gains overnight as openness to risk lifted U.S. Treasury yields and propelled Wall Street stocks to record highs.
The dollar had dropped to 113.86 yen after U.S. non-farm payroll (NFP) data on Friday failed to live up to the more optimistic expectations.
“Tokyo shares have risen in line with Wall Street, which hit record highs, and the trend is continuing in which dollar/yen follows equities higher,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.
The chance for dollar/yen to test last week’s 115.60 peak depends on whether the upward momentum continues in the European trading session as many U.S. market players will be away for Veterans Day, Suzuki said.
The U.S. bond market will be closed on Tuesday for the holiday.
The market looked ahead to a batch of key U.S. data releases late this week that may further underscore the brighter U.S. economic outlook relative to Europe and Japan. U.S. indicators due Friday include retail sales and consumer sentiment.
“USD buyers took advantage of the post-NFP dip to build on longs,” Elsa Lignos, senior currency strategist at RBC Capital Markets, wrote in a note to clients.
“We argued that relative to anything other than rather bloated expectations, Friday’s payrolls report was a solid release and we prefer to fade USD weakness this week.”
Diverging policy paths between the Federal Reserve and major counterparts such as the Bank of Japan, which surprised markets by easing monetary policy further on Oct. 31, have been a key driver of the dollar against the euro and the yen in the past few months.
Yet with U.S. inflation tame, commodity prices falling and global growth expectations weak, markets have resisted bringing forward the likely timing of a U.S. interest rate hike. Many analysts still see mid-2015 as a possible window for the first tightening since 2006.
Earlier on Tuesday, data showing Australian home prices rising 1.5 percent in the third quarter gave the beleaguered Australian dollar some respite, although the U.S. dollar’s gains later in the Asian session halted the advance.
Australia’s currency stood little changed at $0.8626 after spiking to $0.8652. It had fallen to a four-year low of $0.8540 late last week as declining commodity prices clouded prospects for the country’s economy.
The euro traded flat at $1.2423, keeping some distance from a two-year trough of $1.2358 touched last week. (Editing by Shri Navaratnam and Richard Borsuk)