FOREX-Euro and dollar slip against the yen, falls seen limited
* Dollar pressured against the yen, support at Jan. 1 low
* Euro to remain firm vs dollar ahead of ECB meeting
NEW YORK Jan 8 (Reuters) - The dollar and the euro slipped against the yen on Tuesday as more investors bet recent gains were too far, too fast even with current expectations for looser monetary policy in Japan.
Analysts and traders said the yen had scope to rebound further in coming days, although gains will be capped by investor expectations that the Bank of Japan will ease monetary policy.
The dollar has rallied against the yen since Japan's newly- elected government said it would push the Bank of Japan headed by Governor Masaaki Shirakawa to adopt more forceful monetary stimulus measures.
Earlier on Tuesday the euro gained against the yen after Japanese Finance Minister Taro Aso said the government would buy bonds issued by the European Stability Mechanism (ESM), the euro zone's permanent bailout fund.
"The FX focus has been on plans for Japanese stimulus, rumoured to be $228 billion and the finance minister's comment that he favours buying foreign bonds, including the ESM, with FX reserves," said Camilla Sutton, chief currency strategist, at Scotia Capital in Toronto.
The dollar fell to a session low of 87.21 yen after a rally of nearly 12 percent in recent months which saw the dollar touch its highest level since July 2010.
It was last down 0.4 percent at 87.49 yen, with solid support expected at around 86.52 yen, the low hit on Jan. 1.
But analysts said investors were nervous of pushing the yen too much lower due to the risk the BOJ may not opt for aggressive stimulus as early as its next meeting on Jan. 21-22.
"We still have Shirakawa (as BOJ governor) who is not leaving until end of March so there is a risk of disappointment," said Chris Turner, head of FX strategy at ING in London.
The euro was last down 0.35 percent on the day at 114.44 yen, having earlier hit a session high of 115.21 yen after Finance Minister Aso's comments. The session high was still below an 18-month high of set on Jan. 2.
The initial move faded as the finance ministry's decision would have little impact on the yen as Japan would most likely buy ESM bonds using existing foreign reserves.
"Japan's comments helped euro and dollar/yen a bit higher at first. But then everyone realised they are just going to use current reserves so there should actually be no impact," said Geoff Kendrick, FX strategist at Nomura.
The euro was down 0.2 percent on the day against the dollar at $1.3088, still almost a cent above a three-week low set on Friday.
Markets are positioned for the European Central Bank to keep rates on hold when they meet this Thursday.
With no significant economic data due on Tuesday, the euro would stay in a range ahead of the ECB meeting and Spanish and Italian bond auctions towards the end of the week.
However, any hint by ECB policymakers about future interest rate cuts could undermine the currency.
"Markets have backed away from peripheral issues in Europe for now and unless we start to get broader concerns, euro/dollar will continue to trade sideways for now," said Geoff Kendrick, FX strategist at Nomura in London.
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