* N Korea tensions, China downgrade weigh on risk sentiment
* Dollar bolstered by Fed’s signal that hike is possible this year
* BOJ maintains commitment to easy monetary policy
By Lisa Twaronite
TOKYO, Sept 22 (Reuters) - The dollar edged down on the yen in early Friday trade against a backdrop of simmering tensions on the Korean peninsula, though the sharp divergence between U.S. and Japanese monetary policy contained the greenback’s losses.
North Korean Foreign Minister Ri Yong Ho said on Friday he believes the North could consider a hydrogen bomb test on the Pacific Ocean of an unprecedented scale, South Korea’s Yonhap news agency reported.
Investors also looked to see how Chinese financial markets would react to S&P Global Ratings’ downgrade to China’s credit rating..
The dollar index, which tracks the U.S. unit against a basket of six major rivals, edged down 0.1 percent to 92.156 , up 0.4 percent for the week and holding well above its more than 2-1/2 year nadir of 91.011 marked on Sept. 8.
The dollar dipped 0.2 percent to 112.28 yen, but was still up 1.3 percent on the week in which it scaled a two-month peak of 112.725.
On Thursday, the Bank of Japan maintained its policy settings, including its loose pledge to keep buying bonds so its holdings increase at an annual pace of 80 trillion yen ($717.6 billion). Also, surprising markets, a new board member argued against the central bank’s view that current policy was sufficient to boost inflation to its target.
That contrasted with the Federal Reserve’s plan, announced on Wednesday, to begin paring its balance sheet from next month. It also indicated that one more rate increase by the end of the year remains possible.
Many investors had expected the Fed to strike a more dovish tone in light of the potential economic impact of recent hurricanes and the persistence of sluggish inflation.
“The market is unwinding an overly pessimistic view on U.S. rates, which is the reason that the dollar has bottomed, overall,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
“In the very near term, the dollar-yen could show some correction toward 112,” he said, amid the simmering tensions on the Korean peninsula.
North Korea’s leader Kim Jong Un said on Friday Pyongyang will consider the “highest level of hard-line countermeasure in history” against the United States in response to U.S. President Donald Trump’s threat to destroy the isolated nation.
The yen tends to benefit during times of crisis due to Japan’s net creditor nation status, and the expectation that Japanese investors would repatriate assets.
The euro was nearly unchanged on the day at $1.1942 and also flat on the week.
On Thursday, European Central Bank President Mario Draghi said monetary policy is not an appropriate tool to address financial imbalances but offered no fresh insight on the central bank’s asset purchase program. (Reporting by Lisa Twaronite; Editing by Shri Navaratnam)