FOREX-Yen sets 2-week high vs dollar on Syria uncertainty
* Dollar hits 2-week low vs yen; later comes off lows
* Markets nervous as Middle East tension heats up
* U.S. & allies gear up for probable strike against Syria
SINGAPORE, Aug 28 (Reuters) - The safe haven yen hit a two-week high against the dollar on Wednesday, after posting its biggest rally in more than two months the previous day as investors scrambled for safety amid heightened geopolitical tensions.
The United States and its allies are gearing up for a probable military strike against Syria that could happen within days as punishment for last week's chemical weapons attacks blamed on President Bashar al-Assad's government.
Amid jitters about the possibility of action against Syria, the dollar initially fell against the yen on vague rumours of a bombing in Syria, with stop-loss dollar selling at levels near 97.00 yen and below adding to the greenback's drop.
But market players later became sceptical of the talk, helping the dollar pull up from its intraday low versus the yen.
"There was (dollar) selling on rumours of a bombing in Syria. But the situation remains unclear," said a Tokyo-based trader. The dollar also got a lift due to demand related to the 0100 GMT Tokyo fixing, he said.
Such dollar buying at the Tokyo fixing often reflects demand from Japanese importers.
The dollar slipped to as low as 96.81 yen on trading platform EBS, the greenback's lowest level against the Japanese currency since Aug. 12.
The greenback last stood at 97.10 yen, up 0.1 percent on the day. On Tuesday, the dollar had tumbled about 1.5 percent, its biggest one-day drop versus the Japanese currency since June 11.
The Australian dollar eased 0.2 percent to 86.98 yen , after having shed 2 percent on Tuesday. A drop below the Aug. 7 low of 86.36 yen would take the Australian dollar to its lowest level since December.
Analysts said the investor jitters over the heightened geopolitical tensions have triggered buy backs of the yen and given the Japanese currency a boost.
This is especially the case, given that going short the yen and buying Japanese equities have been two of the preferred bets among market players, said Daisuke Karakama, market economist for Mizuho Bank in Tokyo.
Still, Karakama said he doubted that the yen was set to rally sharply against the dollar from current levels, adding that the dollar may settle into a range of roughly 96 yen to 99 yen.
"There will probably be some yen-selling by Japanese players if the dollar were to fall below 95 yen," Karakama said, adding that Japanese institutional investors might buy the dollar if the greenback dips to such levels.
The euro inched up 0.1 percent versus the yen to about 130.03 yen. Against the dollar, the single currency was steady at $1.3394.
Some analysts said the jitters about Syria might only have a short-lived impact on financial markets.
"To me it is actually not clear that Syria is necessarily that big a negative for global markets for more than a few days," CitiFX's Head of Latam Strategy Dirk Willer said in a note.
"But the outsized reaction in EM suggests that EM is still extremely fragile and can easily get buffeted by any negative headline."
Indeed, many emerging markets were already on shaky ground thanks to an outflow of hot money as investors positioned for the U.S. Federal Reserve to begin scaling down its bond-buying stimulus next month.