FOREX-Dollar hit by Japan govt adviser's yen comment, drags index lower

* Dollar/yen rise stalls on comments from Japan govt adviser

* Dollar index touches new 11-yr high after U.S. debt yields spike

* RBA opts to leaves rate unchanged at 2.25 pct (Recasts, adds comments)

By Anirban Nag

LONDON, March 3 (Reuters) – The dollar eased from an 11-year peak against a basket of currencies on Tuesday, hit by losses against the yen after an economic adviser to Japanese Prime Minister Shinzo Abe said the greenback could not sustain more gains.

Etsuro Honda, who some analysts described as a proponent of yen weakness, told the Wall Street Journal in an interview that dollar/yen may be at the “upper limit of comfort zone”.

The comments pulled the dollar off a three-week high of 120.27 yen hit earlier due to a spike in U.S. debt yields. It last traded at 119.78, down 0.3 percent. The euro was also lower at 134 yen.

“Honda’s comments reflect the latest view of the government and comes ahead of a proposed visit by Abe to the United States in April,” said Yujiro Goto, currency strategist at Nomura.

“They might not want the yen to weaken too much ahead of the visit. So in the short term the yen’s weakness could slow, but over the medium term it will still weaken.”

Some countries, especially in the G7, had complained about sharp yen weakness in early 2013, just as Abe came to power and the Bank of Japan was about to embark on a huge quantitative easing programme to get inflation back to 2 percent.

The criticism about waging a “currency war” by driving the yen sharply lower to boost exports have made the Japanese sensitive to excessive weakness in the currency. Nevertheless, with the U.S. Federal Reserve expected to tighten monetary policy sometime later this year, the dollar is likely to resume its upward trek, traders said.

“In addition to some option-related selling above 120 yen, Honda’s comments helped send the dollar lower. The pullback in Japanese shares is another factor weighing on the dollar today,” said Kaneo Ogino, director at Global-info Co in Tokyo.

The Nikkei sagged 0.2 percent on Tuesday.

“But these factors are only short-term selling factors. Dollar/yen firmly remains in an uptrend long term,” Ogino said.

The dollar index climbed to 95.516, a high not seen since September 2003 before drifting down to 95.353, down 0.1 percent on the day.

The Australian dollar rose 1 percent against the greenback after the Reserve Bank of Australia opted to leave its policy rate unchanged at a record low of 2.25 percent, surprising some who had looked for another easing after February’s cut.

The Aussie jumped to a high of $ 0.7845 before settling at $ 0.7820, still up 0.8 percent on the day. Analysts said the Aussie’s rebound might prove temporary, as the RBA is still expected to take rates lower sooner or later.

The euro, meanwhile, was flat at $ 1.1192, crawling up from a six-week low of $ 1.1160 struck overnight.

(Additional reporting by Shinichi Saoshiro; Editing by Catherine Evans)

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