(Recasts, adds new quote, updates dateline from previous TOKYO)
* Dollar slips below 117 yen
* Euro given breathing space as dollar weakens broadly
* Wider yield spreads to support dollar vs euro longer term
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, Dec 29 (Reuters) - The dollar slipped to a two-week low against the yen on Thursday, mirroring a fall in U.S. bond yields as weaker-than-expected economic data weighed on the greenback and waning risk appetite boosted Japan's safe-haven currency.
Japan's Nikkei stock index - which tends to move in the opposite direction to the yen - shed 1.3 percent as Toshiba Corp dived 16 percent after news of potential massive writedowns led to a downgrade of its credit ratings. The dollar dipped 0.8 percent to 116.30 yen.
Against a basket of major currencies, the greenback fell almost half a percent to a one-week low, extending falls late on Wednesday after data showed contracts to buy previously owned U.S. homes falling to their lowest level in nearly a year.
Yields on 10-year U.S. Treasury yields - which have in recent months been closely correlated with the dollar/yen exchange rate - fell to their lowest in two weeks, having soared to a more-than-two-year high above 2.6 percent earlier in the month.
"We had a huge sell-off in the U.S. bond market since the U.S. election...so perhaps we've seen the crescendo of selling, at least initially," said MUFG currency economist Lee Hardman, in London.
"If that's the case and U.S. yields stabilize or come back lower in the near term, there's some scope there for dollar/yen to drift lower in the near term as well.
Hardman added that the break below 117 yen, which had provided a floor during the Christmas period in which volumes have been thin, had accelerated the move lower.
Sterling edged back up from two-month lows to $1.2250 , but was on track for a 17 percent fall against the greenback in 2016 - its worst performance since 2008.
And the euro was also given breathing space as the dollar weakened across the board. The common currency climbed 0.3 percent to $1.0450 after falling to as low as $1.0372 the previous day.
"The dollar looks like it has run its course against the yen for now. But against the euro, the dollar still has room to gain as the pair is now trying to catch up to the widening between U.S. and German yields," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.
The spread between the 10-year U.S. Treasury and German bund yields is the widest on record stretching back to 1990.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Elaine Hardcastle)