* U.S. housing starts fall but single-family housing gains * Japan PM Abe backtracks on foreign bond buying * Sterling drops sharply after dovish BoE minutes * RBNZ governor says New Zealand dollar overvalued By Gertrude Chavez-Dreyfuss NEW YORK, Feb 20 The dollar edged higher against the yen on Wednesday, helped by data showing an overall improvement in the U.S. housing market. U.S. housing starts declined last month, but the fall was due to the more volatile multi-family component, while the single-family category rose to its highest since July 2008. Building permits also increased to their quickest pace since June 2008. "This is a data-driven pop in the dollar because we saw U.S. yields tick higher following the report," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut. "Housing starts may have missed but they are still relatively high compared to where we are in the cycle. Overall, I would say, housing starts and building permits were generally constructive." The report's impact on the dollar versus the yen was a bit of a surprise as, for the past few months, the currency pair has been driven by Japanese monetary policy despite major U.S. data. The yen had gained on Tuesday on signs of a rift between Japanese Prime Minister Shinzo Abe and Finance Minister Taro Aso with respect to foreign bond purchases. Aso had said that he was not considering foreign bond buying, while Abe had indicated that was an option. The disagreement suggested Japan's supposedly aggressive monetary policy was less clear cut than before, which could slow the pace of yen selling. On Wednesday, however, both Japanese officials seemed to be on the same page. Abe mirrored Aso's stance, saying the need to establish a public-private sector fund to buy foreign bonds has diminished. Foreign bond purchases would have helped push the yen lower, so suggestions that Japan is no longer considering this helped the currency. The possibility of setting up a foreign bond-buying fund had been included in a campaign platform drawn up by Abe's Liberal Democratic Party ahead of a national election last December. The dollar fell as low as 93.11 yen after Abe's remarks, before recovering to trade at 93.71 yen, up 0.1 percent on the day, helped largely by the U.S. housing data. The greenback though was still below a nearly three-year high of 94.42 hit on Feb. 11. The euro, meanwhile, was 0.1 percent higher at 125.39 yen. Europe's common currency also trimmed losses against the dollar to trade little changed on the day at $1.3374, drawing support from the generally positive U.S. housing numbers suggesting traders were putting a bit more risk on the table. Sterling, however, stole the limelight in the European session, tumbling to its lowest in more than eight months against the dollar and a 16-month trough versus the euro after minutes from the latest Bank of England meeting showed policymakers were willing to ease policy further. The pound last traded down 0.8 percent at $1.5301, while the euro last changed hands at 87.42 pence, up 0.7 percent on the day. Investors will now turn to the release of minutes from the U.S. Federal Reserve's latest policy meeting. Any hint the Fed is getting closer to paring back its asset purchase scheme could help lift the dollar broadly. In early New York trading, the dollar index was up 0.2 percent at 80.59. NEW ZEALAND DOLLAR DROPS Also on Wednesday, Reserve Bank of New Zealand governor Graeme Wheeler said global imbalances and a weak U.S. dollar were driving up the New Zealand dollar and had left the currency overvalued compared to economic fundamentals. The New Zealand dollar slid 0.9 percent to US$0.8388 after those comments. "Currency wars are still what's driving markets, whether it's the RBNZ, or Japan talking about buying or not buying bonds," said Daragh Maher, currency strategist at HSBC. "Even when we have juicier bits of data we are still worrying more about what BoJ members say."