Yen rallies as China jitters grip markets, dollar slips on Fed

By Ian Chua

SYDNEY (Reuters) - The yen held onto hefty gains early on Thursday, having posted its biggest one-day rally against the greenback this year as investors unwound short positions amid a slump in global equities triggered by panic selling in Chinese stocks.

The dollar tumbled 1.5 percent on the yen on Wednesday, suffering its biggest drop since December. It fell as far as 120.410 yen , before steadying at 120.690.

The euro skidded to a six-week low of 133.315 yen , while the New Zealand dollar slumped to a 20-month trough of 80.62 yen . Both currencies have since recovered just a bit of ground to stand at 133.720 and 81.07 in early Asian trade.

The greenback also came under a bit of pressure as U.S. yields eased following the release of minutes of the Federal Reserve's June meeting.

Greg Moore, senior currency strategist at RBC Capital Markets, said the minutes were taken as sounding slightly more cautious with 'many participants' concerned about the potential spillover from the Greek situation.

"Keep in mind these minutes reflect the committee's view of a few weeks ago and the Greece situation has only worsened since then," he said.

"On top of that, external spillover risks from elsewhere -China - have crept up in a significant way as well since then."

San Francisco Fed President John Williams said he still believed the Fed will start to hike this year but added he was "wary of acting before gathering more evidence that inflation's trajectory is on the desired path."

The euro climbed to $1.1075 , pulling further away from a one-month trough of $1.0916 plumbed on Tuesday. As a result, the dollar index dipped to 96.215, recoiling from a one-month high of 97.235.

The Australian dollar popped back above 74 U.S. cents , turning around from a six-year trough of $0.7372.

Often used as a liquid proxy for China plays, the Aussie was hit hard on Wednesday after a rout in Chinese stocks fanned fears that officials were unable to stabilise a market that has dropped about 30 percent in a month.

The near-term outlook for the Aussie hinges on Australian employment data and Chinese inflation figures due at 0130 GMT. Traders said any disappointment in those numbers could easily send the Aussie back down again.

The selloff in Chinese equities managed to distract the market from developments in Greece, although there was little to speak of on Wednesday.

Athens has formally applied for a three-year loan and European authorities launched an accelerated review of the request.

(Editing by Shri Navaratnam)