* 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 buckled on Friday as tensions simmered on the Korean peninsula, though the sharp divergence between U.S. and Japanese monetary policy kept the greenback on track for a winning week against the yen.
The dollar index, which tracks the U.S. unit against a basket of six major rivals, fell 0.3 percent to 92.024, still up 0.2 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 dropped 0.6 percent to 111.83 yen, but was still up 0.9 percent for the week, in which it scaled a two-month peak of 112.725.
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.
The report followed North Korean leader Kim Jong Un’s statement on Friday that 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.
“People have become very accustomed to trading the North Korea story headlines,” said Bart Wakabayashi, Tokyo Branch Manager of State Street Bank.
“The dollar’s move lower was triggered by a reaction to the latest North Korea news, but there was also an element of trading strategy, as people took the opportunity to lock in their profits on a Friday before closing their books ahead of the weekend,” he said.
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.
Adding to investors’ risk-aversion was S&P Global Ratings’ downgrade to China’s sovereign credit rating. On Friday, the ratings agency said the country’s attempts to reduce risks from its rapid buildup in debt are not working as quickly as expected and credit growth is still too fast.
The downgrade weighed on the Australian dollar, which fell to as low as $0.7908, its weakest since late August. China is Australia’s leading trading partner and the Aussie is often considered a liquid proxy for yuan.
Falling metals and iron ore prices also pressured the Aussie, as well as comments on Thursday from the country’s central bank governor that were less hawkish than some had anticipated.
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.
The euro edged up 0.1 percent to $1.1957 and was also up 0.1 percent for 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 and Sam Holmes)