* Investors turn risk averse before earnings season
* Focus on Fed meeting minutes due on Wednesday (Updates prices, adds Kocherlakota comments)
By Karen Brettell
NEW YORK, July 8 (Reuters) - The U.S. dollar fell against the Japanese yen on Tuesday as yields on long-dated Treasuries dropped for a second day, with investors wary of stocks heading into the U.S. corporate earnings season.
The dollar has erased the gains it made against the yen on a U.S. employment report last Thursday that showed the U.S. economy continuing to gain strength. It has stabilized at two-week highs against the euro.
Safety buying of long-dated Treasuries is seen as limiting dollar strength, at least in the near term, with investors wary of a stock market at record levels.
“We’ve seen a bit of risk aversion in the market and the tendency for yields to fall in the U.S., and the dollar to fall in sync with it,” said Sebastien Galy, senior foreign exchange analyst at Societe Generale in New York. “It’s driven by equities.”
Yields on two-year Treasuries notes have risen above the key 0.50 percent level even as yields on long-dated Treasuries have fallen, indicating near-term market jitters.
The dollar fell 0.30 percent against the yen on Tuesday to 101.51 yen, down from 102.82 yen late on Monday.
Falling Treasury yields benefit the yen against the dollar as they make U.S. bonds relatively less attractive, even though Treasuries still pay much higher yields than Japanese government debt, said Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York.
“The dollar is sensitive to U.S. interest rates and U.S interest rates are lower now than they were after we got the jobs data,” Chandler said.
The spread between yields on 10-year Treasuries and Japanese equivalents contracted to 202 basis points on Tuesday, from 208 basis points last Thursday.
The next major focus for the market will be the release on Wednesday of minutes from the U.S. Federal Reserve’s June meeting, which will be scoured for signs of when central bank members see an interest rate increase as likely.
Analysts see the dollar as unlikely to rally further in the absence of stronger indications from the Fed that a rate increase is coming in 2015.
Minneapolis Fed President Narayana Kocherlakota said on Tuesday that he welcomed the recent drop in U.S. unemployment but warned the labor market has a long way to go until the U.S. central bank has reached its goal on employment.
Jeffrey Lacker, president of the Richmond Fed, said that he sees inflation firming this year, and that data gathered in the last few months was not the “noise” that some think, underscoring his hawkish view that inflation threats are gaining.
The dollar fell 0.05 percent against the euro to $1.3610. The dollar has largely traded sideways against the euro for the past three days, after an initial rally on Thursday’s U.S. jobs data.
The dollar index, which tracks the greenback against a broad basket of currencies, dipped to 80.175, down from 80.218 on Monday. (Editing by Peter Galloway, Nick Zieminski and Steve Orlofsky)