* Dollar down as much as 0.7 pct vs yen
* BOJ bond move stokes speculation of tapering
* Dollar holds below $1.20 against the euro
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, Jan 10 (Reuters) - The U.S. dollar skidded further to a six-week low against the Japanese yen on Wednesday after the Bank of Japan’s move to trim its government bond (JGB) purchases in the previous session stoked speculation it would ease its massive monetary stimulus.
The dollar slipped as much as 0.7 percent to 111.765, its lowest since Dec. 1, after Tuesday’s 0.5 percent fall when Japan’s central bank reduced the amount of its JGB purchases in its regular buying operations — a slight tweak to policy.
There was no further news on Wednesday but analysts put the extended sell-off down to traders betting that the bank could be poised to begin winding down its stimulus.
The yen was also up against other currencies including the euro, against which it gained 0.5 percent.
“Japanese yields have been rising and this has been reinforcing the move on the yen,” Thu Lan Nguyen, a Frankfurt-based FX strategist at Commerzbank.
Nguyen, however, called the market expectations of an early end to an expansionary BOJ policy “premature” because the bank can defend its 10-year yield target without buying so many bonds, and because inflation pressures in Japan remain low.
Moreover, market positioning on the Japanese yen has been extremely short as investors have ramped up its use as a funding currency in recent months to buy relatively higher yielding debt in the United States and elsewhere.
The dollar weakness underlines the greenback’s vulnerability to other central banks’ moves towards normalizing monetary policy, a feature of 2017 that has continued to weigh on the dollar into 2018.
Two U.S. interest rate hikes this year are priced in but the market has only recently started to price in tightening moves by other central banks.
The dollar was down 0.2 percent against a basket of currencies but held the key level of below $1.20 against the euro.
While the majority of traders are positioned for a euro rise in the medium term, the single currency has this week traded below a nearly four-month high of $1.2089 set last week.
Yields on the 10-year U.S. Treasury note reached a 10-month highs, partly lifted by the BOJ’s action, which traders would have otherwise expected to boost the dollar.
The 10-year note yield stood at 2.558 percent in Asian trading, up from its U.S. close of 2.546 percent on Tuesday.
“The BOJ’s move reminded traders of the fact that major central banks are willing to normalize their monetary policy,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“I think this unwanted strengthening of the yen will make the BOJ more cautious in going forward, when they want to move toward normalization,” he said.
For Reuters 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 (Reporting by Tommy Wilkes; Additional reporting by Lisa Twaronite in TOKYO; Editing by Saikat Chatterjee and Catherine Evans)