FOREX-Yen hits 8-month high versus dollar, euro slips

* Yen hits 8-month high vs dollar, dollar/yen below 89

* Japan finmin says yen gain not abnormal, then backtracks

* Dollar higher versus euro, basket of currencies (Recasts, adds quote, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Sept 28 (Reuters) - The yen rose to an eight-month high against the dollar on Monday after comments by Japan's finance minister raised speculation the new government was unlikely to intervene to weaken its currency.

The dollar dropped for the third session versus the Japanese currency, sliding below 89 yen, after Hirohisa Fujii told Dow Jones newswires current moves were "not abnormal."

The yen later gave up most gains as Fujii said it was wrong to see his comments as a license to push the yen higher. Japanese Prime Minister Yukio Hatoyama said yen gains had been been tough for small firms. See [ID:nTKF106629] [ID:nT241084].

"The comments by the finance minister seemed to be an open door to people who were bullish on the yen," said David Watt, senior currency strategist at RBC Capital Markets.

"His subsequent statement and the statement by Japan's prime minister both caused people to take a little bit of a pause -- that the Japanese yen is not so much of a one-way bet," he added.

In afternoon trading in New York, the dollar traded 0.1 percent lower at 89.55 yen , after falling as low as 88.22 yen, according to Reuters data, the lowest level since January. The dollar/yen pair has dropped about 4 percent so far this month.

Analysts said more yen gains were likely and that a rally to the year's high around 87.10 yen was possible.

But Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey, said the dollar/yen pair may have seen the bottom for now.

"We might have just put in a significant low in dollar/yen overnight. Typically when you get a very sharp rebound like (today's), it's an indication that the down move is beginning to reverse," he said.

"Ultimately, we think (Fujii) is going to have to moderate his views on the strength of the yen or Japanese exporters are going to be in dire straits very soon," he added.

STRONG DOLLAR

The U.S. dollar, however, rose against the euro and a basket of currencies despite a rally in U.S. stocks. The dollar and equities have moved conversely of late as optimism of an economic recovery has prompted investors to scoop up higher-yielding assets.

"The dollar in general looks to have stepped back from some of those typical relationships," Dolan said. "It's more a gradual shift in sentiment that the dollar has weakened sufficiently and its inability to make new lows is starting to see some of the dollar short positions to come off."

The euro slipped 0.5 percent to $1.4611. The ICE Futures U.S. dollar index, which tracks the greenback versus a basket of six currencies, rose 0.2 percent to 76.949 <.DXY>.

Comments from European Central Bank President Jean-Claude Trichet on Sunday that U.S. policy makers' commitment to a strong dollar was important in keeping currency markets and the global economy stable also caused some dollar buying. For more, see [ID:nSP409924].

Analysts said that with last week's Group of 20 meeting past, focus was turning to this week's busy economic calendar, including a key U.S. jobs report on Friday.

The pound stayed on the ropes, sliding to its weakest since late May and breaking below support for sterling around $1.5800. It last traded at $1.5859 , down 0.6 percent. (Additional reporting by Leah Schnurr; Editing by Chizu Nomiyama)