* Dollar-yen continues to track Nikkei moves
* Some BOJ members uneasy about feasibility of 2 pct inflation target
* U.S. and UK markets closed for holidays
By Sophie Knight
TOKYO, May 27 (Reuters) - The dollar lost ground against the yen in Asian trading on Monday as another steep fall in Japanese equities boosted investor appetite for bonds, extending a trend last Thursday that led the currency pair to its biggest weekly drop in a year.
The greenback last bought 100.96 yen after choppy trade that saw it climb as high as 101.82 in the early morning session and as low as 100.79 as the Nikkei dropped 4 percent, though it later narrowed its losses.
However, the dollar managed to hold just above Friday’s trough of 100.68 yen, with support at 100.38, the Kijun line on its daily Ichimoku chart. Market participants said a new trend was unlikely to develop on Monday as both U.S. and UK markets are closed for holidays.
Last week, the dollar lost 1.9 percent against the yen. The pullback began on Thursday, when poor Chinese data prompted investors to jolt the Nikkei off a 5-1/2-year high and scramble for safety to Japanese bonds.
“I think that the Nikkei’s moves at the moment are more driven by day traders rather than macro data ... the Japanese market has become like a toy,” said Makoto Noji, senior strategist at SMBC Nikko Securities.
“I think forex traders are more likely to act on the macro data, especially U.S. data. That’s really about whether the Fed will exit QE3 or not.”
Yen buying pressure at the end of last week helped to pause the dollar’s broad gains in the previous fortnight, which were driven by expectations that the U.S. Federal Reserve may wind down its bond-buying programme earlier than scheduled.
On Monday, the dollar index dipped 0.1 percent to 83.683 after dropping 0.7 percent last week, when Fed Chairman Ben Bernanke told Congress the central bank will not reduce its easing unless the economy showed further signs of improvement.
Japan’s central bank, on the other hand, may be expected to ramp up its already aggressive easing programme if its economic indicators do not pick up, said Ayako Sera, senior market economist at Sumitomo Mitsui Trust
“A lot of people will be focusing on Friday’s consumer price index data after one BOJ member said the 2 percent target looks a bit difficult to achieve,” she said, referring to minutes from the BOJ’s last policy meeting released on Monday.
Friday will see the release of a raft of Japanese data, including household spending, unemployment figures and industrial output.
The euro edged 0.1 percent off Friday’s late U.S. levels to $1.2929 after rising 0.7 percent last week, its first weekly gain in three weeks, supported by signs of improvement in German business morale on Friday.
“All the attention is on the dollar-yen at the moment, which has left the euro quite steady for now,” said Sera of Sumitomo Mitsui Trust, adding that reactions to poor data were relatively muted now that weakness in the euro zone economy was largely priced in.
The next line of resistance for the common currency is said to lie around its 20-day moving average at $1.2992.
Against the Australian dollar the euro edged down 0.2 percent to 1.3424, staying below stops around 1.3500 cited by market participants. The common currency has gained just over 10 percent against the Aussie since April 3, when it hit a nearly five-month low of 1.2213.
Against the U.S. dollar, meanwhile, the Aussie continued to pitch downwards, losing 0.2 percent to $0.9628. Its 7 percent tumble this month has been led by concerns about sluggishness in the Chinese economy as commodity prices weaken.
If the Aussie remains more than 6.6 percent down by Friday, this would mark its worst month since September 2011, when it fell 9.7 percent.