* Yen rebound can extend further, but weaker trend intact
* Dollar on pace for 2.2 percent weekly loss vs yen
* Euro heads for 1st weekly gain in three after German Ifo
NEW YORK, May 24 (Reuters) - The dollar was headed on Friday for its worst week against the yen in nearly two years, extending the prior session’s selloff, as volatility in Japan’s stock market spurred investors to book profits on their bets against the Japanese currency.
Aggressive monetary easing by the Bank of Japan has driven the U.S. currency up 16 percent so far this year to a 4-1/2-year high, with analysts expecting further gains. The euro has gained 14 percent this year.
But the yen rebounded after Federal Reserve Chairman Ben Bernanke on Wednesday sparked speculation the U.S. central bank may be close to reducing its bond-buying, which led to a selloff in global equities and a rush towards safe-haven currencies.
Some analysts believed the yen’s recent selloff may have gone too far, two fast, although any rebound would likely be temporary on expectations of further easing in Japan. Hopes the Fed may be winding down its stimulus later this year would add to the dollar’s momentum.
“The near term outlook is for mean reversion back to the 100 level,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. “We think that the dollar/yen has probably overshot its fair value.”
He said the long weekend with the U.S. Memorial Day on Monday also prompted investors to book profits.
The dollar fell 1.1 percent to 100.90 yen, after hitting a session low of 100.68, according to Reuters data, a two-week low.
On the week, it’s headed for a loss of 2.24 percent, the worst weekly performance since July, 2011.
Japan’s Nikkei stock average, having swung from gains of 3.6 percent to losses of 3.5 percent, ended Friday’s session 0.9 percent higher. On Thursday, it fell as much as 7.3 percent.
“The yen weakening trend will remain. But there will be a correction in the short term and it could be a sizeable one,” said Ian Stannard, Morgan Stanley head of European FX strategy.
The euro fell 1.1 percent to 130.51 yen, having hit a session low of 130.10 yen.
Against the dollar, the euro was last little changed at $1.2933.
Earlier, the euro climbed after the monthly German Ifo survey showed business morale improved far more than expected in May, suggesting Europe’s largest economy is picking up.
But the dollar rebounded after better-than-expected U.S. durable goods data for April eased investor concerns about the U.S. economy. .
On the week, the euro rose about 0.7 percent, its first weekly rise in three weeks.
The dollar fell 1 percent against the Swiss franc, another safe haven which has recently tracked the yen lower.