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Safe-haven yen surges amid end-of-year investor nerves

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The yen gained sharply against the dollar and euro on Tuesday as investors sought the traditional safety of the Japanese currency amid end-of-year nerves over looming economic risks.

The risk of Greece dropping out of the euro zone returned to haunt the single currency after Greek lawmakers failed to elect a president on Monday, triggering a general election next month, while broader concerns over slowing global growth and deflation are also troubling investors as they look to 2015.

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Worries over global demand have helped cause a collapse in oil prices, which hit a fresh 5-1/2-year trough below $57 a barrel on Tuesday, dragging down stock markets and the dollar with them.

An almost 1 percent rise for the yen to 119.56 per dollar knocked the greenback off a more than 8-1/2-year high against basket of currencies. The dollar index was last down 0.3 percent at 89.967.

Japan's Nikkei stock average, which tends to have an inverse relationship with the yen, shed 1.6 percent on its final trading day of the year.

"Equity markets are coming under selling pressure, while the Greek situation had led to a flight into quality," said Hans Redeker, global head of FX strategy at Morgan Stanley in London, adding that the dollar was set for more gains in 2015.

Most major banks forecast a U.S. interest rate hike in 2015, contrasting with rock-bottom European and Japanese rates and driving more dollar strength. But the greenback may struggle to make further progress while risk appetite remains subdued.

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"It could remain a factor for the dollar if equities are unable to recover early next year in the wake of the Greek situation," said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.

The euro slipped to a 29-month low of $1.2123 in Asian trading and was last flat on the day at $1.21525. Against the yen, it was down 1 percent at 145.25.

Sterling edged up 0.1 percent to $1.5537, close to a 16-month low touched last week, after data showed British house prices rose at their slowest annual rate in more than a year in December.