* Yen, Swiss franc gain after N.Korea fires ballistic missile
* Euro continues to probe 2-1/2-year highs vs dollar
* Dollar index hits lowest since May 2016 (Adds details and quotes)
By Shinichi Saoshiro
TOKYO, Aug 29 (Reuters) - The dollar slumped to a four-month low against the yen early on Tuesday after North Korea fired a missile that passed over northern Japan, the latest act of provocation by Pyongyang that has ramped up tensions in the region over the past month.
The dollar was down 0.55 percent at 108.660 yen after hitting 108.330, its lowest since April 18.
A risk-averse mood prevailed in the region following the missile launch, with Japan’s Nikkei falling to a four-month low.
The yen tends to benefit during times of geopolitical or financial stress as Japan is the world’s biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialize.
North Korea fired a missile early on Tuesday that flew over Japan and landed in the Pacific waters off the northern region of Hokkaido, South Korea and Japan said, in a sharp escalation of tensions on the Korean peninsula.
“Based on past patterns in which the yen has gained on such incidences, speculators reacted immediately to the North Korean missile headlines, taking dollar/yen to the intraday lows,” said Mitsuo Imaizumi, chief FX strategist at Daiwa Securities.
“But dollar/yen trimmed some of the losses after the reports that the missile actually flew over northern Japan.”
The last North Korean projectile to fly over Japan was in 2009. The United States, Japan and South Korea considered that launch to have been a ballistic missile test while North Korea said it was a rocket carrying a communications satellite into orbit.
The Swiss franc touched a one-month high of 0.9497 franc per dollar before pulling back slightly to 0.9532.
The euro lost 0.6 percent to 130.040 yen, dragged back from a three-week high of 130.965 set overnight.
The dollar was already on the defensive, particularly against the euro, after Federal Reserve Chair Janet Yellen did not mention monetary policy at a central bankers’ summit in Jackson Hole last week, and as European Central Bank President Mario Draghi’s held back from talking down the euro at the same meeting.
The dollar had also weakened after Tropical Storm Harvey paralysed Houston, Texas, spurring worries about the storm’s potential impact on the U.S. economy.
The euro was down 0.1 percent at $1.1965 following an ascent to $1.1986, its highest since January 2015.
The dollar index against a basket of six major currencies was steady at 92.274 after slipping as low as 92.137, its weakest since May 2016.
Editing by Sandra Maler & Shri Navaratnam