FOREX-Yen falls on indications G20 won't target Japan's policies
* G20 draft communique omits G7 language on domestic policies
BoJ nominees awaited, less radical Muto seen front runner
* Euro seen remaining under pressure
* Dollar gains vs yen accelerate after U.S. data
By Julie Haviv
NEW YORK, Feb 15 (Reuters) - The yen fell against the euro and dollar on Friday on expectations that the Group of 20 at its meeting this weekend will avoid targeting Japan over policies that have weakened the yen.
The currency market was thrown into turmoil this week after the Group of 7 issued a joint statement stating that domestic economic policies must not be used to target currencies.
But the yen on Friday tumbled on a draft communique prepared for Group of 20 finance leaders, which omits part of the G7 statement declaring fiscal and monetary policy may only be used for domestic economic aims, a G20 delegate said on Friday.
The G20 finance leaders are meeting in Moscow beginning later on Friday.
"The yen has reversed early gains and is now the weakest major currency on reports the language of the G20 statement may differ from that of the G7 countries," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"The G20 is expected to urge members to avoid competitive devaluation, but not echo the G7 view that exchange rates should not be a target of policy," he said.
Federal Reserve Chairman Ben Bernanke on Friday said the United States is acting in line with the position of the G7 by using domestic policy tools to boost growth and reduce unemployment,.
The euro last traded up 0.8 percent against the yen at 125.08 yen, after earlier falling to 122.87 yen, its lowest level since Jan. 30. It hit a 34-month high of around 127.71 last week.
The yen rallied earlier this week on expectations officials would express disapproval of Japan's policy.
The yen gained in the overnight session after Reuters reported that sources said former top financial bureaucrat Toshiro Muto was the front runner to become the next BoJ governor.
Muto is seen as likely to pursue slightly less radical stimulus measures than some of the other contenders. A decision could come in the next few days, the sources said.
"Although this week has been marked by volatility surrounding G7 and G20, it appears the path to currency weakness will remain intact following those events," Bennenbroek said.
"Our bias remains towards further softness in the yen, while the outlook for the euro has also turned more negative on the back of this week's soft economic data," he said.
The euro also remained under pressure against the dollar a day after the release of data showing the euro zone sinking more deeply into recession than forecast. The grim picture is likely to keep alive expectations of a interest rate cut by the European Central Bank.
Euro zone money market rates are also likely to ease in coming weeks, keeping the euro well off the recent highs above $1.37 struck on Feb 1.
The euro last traded flat at $1.3358.
Michael Woolfolk, senior currency strategist at BNY Mellon, said investors should not expect the "currency war" debate to dissipate after this weekend's G20 meeting.
"You've got the G7 on one side and the BRICS on the other," he said, referring to the big emerging economies of Brazil, Russia, India and China. "They have opposing views on zero interest rates."
ECB chief Mario Draghi criticized on Friday recent "chatter" on currencies and said the euro's exchange rate was in line with long-term averages. Like ECB policymaker Jens Weidmann, who spoke earlier, Draghi resisted pressure from some euro zone politicians to target the euro's exchange rate on the grounds it is overvalued.
The dollar extended gains against the Japanese yen and pared gains versus the euro after a slew of U.S. data.
U.S. manufacturing got off to a weak start this year as motor vehicle production tumbled, but a rebound in factory activity in New York state this month suggested the decline would be temporary.
Consumers were a bit more upbeat early this month even as they paid more for gasoline and their paychecks were reduced by higher taxes, other data on Friday showed.
The dollar last traded at 93.64 yen, up 0.9 percent, after earlier hitting a one-week low of 92.21 yen. It had set a 33-month high of 94.465 on Monday and solid chart support was expected at 92.00 yen.
Speculation over what, if anything, G20 officials might say about Japan has been swirling all week.
"The long-term weakening trend for the yen remains intact," said Howard Jones, adviser at money managers RMG Wealth Management. "We are comfortable with our view the dollar will rise to 100 yen in the coming months. It is an easy trade to make money."