FOREX- Dollar regains ground against yen after sharp fall, BOJ concerns linger
* Dollar edges up after falling steeply on lack of BOJ action
* Aussie steadies after touching near 3-year low
* Euro holds near highest level since late February
TOKYO, June 12 (Reuters) - The dollar steadied against the yen on Wednesday after suffering its biggest drop in three years on Tuesday, when investors unwound bearish yen bets as the Bank of Japan held off from introducing fresh steps to curb bond market volatility.
The dollar bounced to 96.53 yen after sinking as low as 95.60 in the previous session and closing down 2.7 percent to mark its biggest one-day fall against the Japanese currency since May 2010, according to the EBS platform.
The euro followed a similar trajectory, reclaiming 0.5 percent to 128.455 yen after losing 2.4 percent to approach the two-month low of 126.19 struck on Friday.
Yen shorts were squeezed after the BOJ disappointed investors hoping for an extension in the maximum duration of its fixed-rate loans - which would be similar to the European Central Bank's long term refinancing operation - to try and quell volatility in the bond market.
"I think 60 percent of the market were expecting something out of the BOJ. Then overseas stocks sold off and I think the risk-off atmosphere helped the yen's gain," said Kenichi Asada, manager of forex at Trust & Custody Services Bank.
"At the moment exporters' dollar purchases have shrunk quite a bit, so it looks like it will be difficult for the dollar/yen to head higher again," he added.
A subsequent report from the Nikkei business daily saying Japan's Financial Services Agency plans to force losses on investors of troubled financial institutions, if necessary, to reduce the burden on taxpayers, was also cited as a contributing factor to yen buying.
The tumult in the Japanese bond market has raised worries that it could undercut the BOJ's ultra-easy policy and damage the government's campaign to revive the world's third-biggest economy.
The yen had slid 20 percent against the dollar between mid-November and May, underpinned by the Japanese government's sweeping policies to stimulate the economy and spurred on by the BOJ's audacious easing programme launched in April.
But the yen has strengthened since then as traders have adjusted their currency hedges on the back of tumbling Japanese shares, and as market players have pared back dollar-long bets as an imminent tapering of the U.S. Federal Reserve's easing programme appeared less likely.
"If growing discussion of an exit strategy for U.S. monetary policy ahead of the FOMC meeting in September were to increase volatility on Japan's bond markets and reignite yen appreciation, we think the BOJ would probably be forced into action such as extending its pooled collateral operations," said Nomura analysts in a note.
The dollar index steadied on Wednesday at 81.171 after slumping in the previous session to 81.034, its lowest in nearly four months as long bets on the greenback were unwound.
The Antipodean currencies, recently under heavy pressure, tiptoed up on Wednesday after hitting multi-year lows on Tuesday. The Australian dollar gained 0.3 percent to $0.9469 after plumbing a trough of 0.9325 on Tuesday, its lowest since September 2010.
Against the broadly stronger Japanese currency, the Aussie dropped to 90.02 yen, its lowest since January 2.
The New Zealand dollar also added 0.3 percent to reach $0.7900 after grazing 0.7761 on Tuesday, its lowest since June 2012.
"As the euro calms down then I think it's difficult to see people being attracted towards the Aussie, even though if you compare fundamentals it's clearly better. I think having no fresh reasons to buy is taken as a negative factor at the moment," said Asada of Trust & Custody Services Bank.
The euro was flat on the day at $1.3314 after touching a 3-1/2 month high of $1.3317 on Tuesday, when Germany's Constitutional Court started a two-day hearing on the legality of the European Central Bank bond-buying scheme that has defused the euro zone debt crisis.
The euro gained after European Central Bank executive board member Joerg Asmussen told the court that the ECB's bond-buying scheme must be unlimited to show the ECB is serious about defending price stability but is in effect limited by its focus on shorter maturity bonds.