* U.S. producer prices record biggest drop in 11 months
* Dudley reinforces Fed expectation of U.S. inflation rebound (Updates with U.S. market open; changes dateline; previous LONDON)
By Saqib Iqbal Ahmed
NEW YORK, Aug 10 (Reuters) - The U.S. dollar slipped to an eight-week low against the Japanese yen on Thursday as continuing tensions between the United States and North Korea led investors to look for assets viewed as less risky.
The dollar was down 0.53 percent against the yen at 109.48 yen, after briefly dropping as low as 109.53. The Japanese currency rallied broadly against most major currencies, including the euro, the kiwi and sterling.
"The yen is the big story really. Risk aversion is still very much a concern for markets," said Shaun Osborne, chief currency strategist, at Scotiabank in Toronto.
The Swiss franc and the yen had notched up impressive gains against the dollar on Wednesday after U.S. President Donald Trump warned North Korea that it would face "fire and fury" if it threatened the United States.
That prompted North Korea to say it was considering firing missiles near Guam, a U.S. Pacific island territory.
The yen is often sought in times of geopolitical tension, partly because Japan has a big current account surplus, and it being the world's biggest creditor nation, there is an assumption Japanese investors may repatriate their foreign holdings in times of heightened global uncertainty.
The dollar weakened after news that U.S. producer prices unexpectedly fell in July, recording their biggest drop in nearly a year and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate increase.
"It reinforces market concerns that inflation is perhaps just not picking up in the way the Fed had been expecting," said Osborne.
On Thursday, New York Fed President William Dudley said he expects sluggish U.S. inflation to rise over the next several months while the hot labor market gets even hotter.
The dollar index, which tracks the greenback against six rival currencies, edged higher after Dudley's comments and was up 0.03 percent to 93.577.
The euro was 0.18 percent lower against the greenback but remains the best-performing G10 currency so far this year with gains of more than 11 percent against the dollar.
The New Zealand dollar was 0.79 lower against the greenback after New Zealand's central bank said it was slightly more uncomfortable with the high level of the local dollar than it had been in May.
Sterling touched a three-week low against the dollar as mixed output and trade data did little to alter investors' downbeat view of an economy struggling to meet Bank of England targets. (Reporting by Saqib Iqbal Ahmed; Editing by Dan Grebler)