FOREX-Dollar eases vs yen, bank nerves keep market wary

TOKYO, Feb 23 (Reuters) - The dollar eased against the yen on Monday, extending losses made on concerns about possible nationalisation of U.S. banks, though Asian traders hesitated to push it much further due to the previous session's high volatility.

The dollar fell more than 1 percent against the yen on Friday and the euro gained as investors used nervousness about the banking sector to abandon bets that the U.S. currency's recent run higher would continue.

The White House said it did not favour nationalising U.S. banks as a tool for repairing the damaged financial system, and regulators were expected to launch "stress tests" soon to determine which banks should get bigger capital cushions. [ID:nN21257393]

But analysts said that uncertainty would keep markets jumpy.

"Asian markets have pretty much opened up with an air of cautiousness following the very volatile price action on Friday," said Sue Trinh, senior currency strategist at RBC in Sydney.

"They're a little bit confused at what appears to be a tentative breakdown of the correlation that everyone has come to know with the U.S. dollar and risk aversion."
The dollar dipped 0.1 percent to 93.17 yen after careening between about 94.40 and 93.30 on Friday.

The euro was down nearly 0.3 percent at $1.2790 after climbing to $1.2885 on Friday.

Tohru Sasaki, chief foreign exchange strategist at JP Morgan in Tokyo, said bank nationalisation concerns could drive the market further on Monday but the connection with dollar sales was not necessarily clear.

The dollar has tended to benefit in times of heightened investor risk aversion.

"The fear of nationalisation was used as an excuse to sell back the dollar," Sasaki said.

Investors also focused on the relationship between the yen and the stock market, as the tendency for shares to rise as the currency weakened appeared to rupture last week, as politics and a deepening Japanese recession weighed on the yen.

The Nikkei share average .N225 fell more than 2 percent after the U.S. Dow industrials ended at a 6-1/2-year low on fears the U.S. government may be forced to nationalise some big banks.

The Nikkei booked its lowest close since Oct. 27 on Friday and the broader Topix .TOPX ended at its weakest in 25 years.

However the yen was picking up some ground. The euro eased 0.24 percent to 119.25 yen , while sterling and the Australian dollar also fell. (Reporting by Charlotte Cooper; Editing by Brent Kininmont)