FOREX-Yen gets upper hand as China markets roiled by credit crunch fears
* Dollar index retreats from near three-week highs
* Fed officials play down fears of imminent stimulus withdrawal
* U.S. data in focus later in the session
TOKYO, June 25 (Reuters) - The yen's safe-haven appeal gave it the upper hand against the dollar in Asia on Tuesday, as a rout in China shares helped end a rally that brought the dollar index close to a three-week peak in the previous session.
Putting up a further road block to the greenback's advance, two top Federal Reserve officials downplayed market fears of an imminent end to stimulus, which gave dollar bulls reason to catch their breath before the next leg up.
China shares slumped to their lowest since early 2009 in inverse relation to climbing mainland interbank rates as the authorities seek to rein in excessive credit growth, raising concerns about a potential money market squeeze. The drop prompted the Nikkei share average to erase its early gains.
"It seems that dollar/yen traders just watch the Nikkei price action and follow it, so if China's dragging the equities lower, then China's dragging dollar/yen lower as well. It's a very temperamental market," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo.
"China came out of nowhere, and was a side blow to everyone's sentiment," he said
Investors will continue to pay close attention to developments in China, said Ayako Sera, senior market economist at Sumitomo Trust Bank in Tokyo.
The benchmark U.S. Treasury yield is down from a nearly two-year high of 2.66 percent touched in the previous session, she said, and that has also helped curb the dollar's ascent.
The dollar and U.S. yields came off their peaks after Minneapolis Fed President Narayana Kocherlakota and Dallas Fed head Richard Fisher both reassured investors who feared the impact of the Fed tapering its monthly $85 billion bond-buying programme.
Kocherlakota said financial markets are wrong to view the Fed as having become more hawkish, while Fisher said the Fed would still be running an accommodative policy even if it reduces stimulus.
Fed Chairman Ben Bernanke said last week that the central bank could trim its bond-buying programme later this year if the economy continues to improve.
That helped propel the dollar index to a near three-week peak of 82.841 on Monday. The index was last nearly flat from late U.S. trading at 82.397.
Some market participants believe that since Fed officials' comments did not contradict anything Bernanke said, the central bank's overall intentions -- and the dollar's direction -- are clear.
"A client made a very nice comment: You can't really taper the tapering. No matter how much they talk now, unless they come out and say they're not going to do any tapering, it's pretty much on the way, with the dollar bid," said State Street's Wakabayashi.
The dollar was slightly lower against its Japanese counterpart at 97.61 yen, well off Monday's two-week high of 98.72 yen. Some U.S. funds continued to buy the dollar on dips against the yen, market participants said.
The euro was steady from late U.S. levels at $1.3124, pulling up from a low of $1.3058 on the EBS trading platform on Monday, its weakest level since June 5.
Investors will focus on U.S. data later on Tuesday in light of the Fed's message that its outlook for stimulus will be tied to how the economy fares in coming months. Durable goods, consumer confidence and housing data are all due later in the day.
The Australian dollar was slightly lower against the U.S. dollar at $0.9247 but remained well above a 33-month trough of $0.9145 touched on Monday, according to Reuters data.
In just two months, it has shed more than 10 percent against the dollar, as commodity currencies were among the hardest hit as investors rushed to unwind carry trades on the prospect of higher U.S. rates.
Resistance now lies at the June 11 low of $0.9324, though some market participants believe the Aussie remains under pressure and could test the downside first.