* Dollar at 7-week low vs yen; fund selling, low rates cited
* Australian dollar gains as rate hike speculation builds
By Charlotte Cooper
TOKYO, Nov 25 (Reuters) - The dollar ground to its lowest in seven weeks against the yen on Wednesday while the Australian dollar rose after a central banker and upbeat construction data supported expectations of a rate rise.
Reserve Bank of Australia Deputy Governor Ric Battellino said the economy had entered a new growth phase that would last for years, helping push the Australian dollar above $0.9200 and gain on the yen on speculation of the third interest rate hike in a row in December.
Traders cited several factors contributing to the dollar's fall, including talk of a large fund selling, rebalancing of the MSCI Japan share index favouring the yen, and the continued prospect of low U.S. rates after Federal Reserve meeting minutes.
Major currencies were not otherwise straying beyond recent ranges which have become established as investors have trickled off to the sidelines ahead of Thursday's U.S. Thanksgiving holiday.
"The market has been in a tug-of-war between continued dollar repatriation flows from players such as hedge funds and their profit-taking in risk assets, and dollar selling to buy high-yielders and commodities," said Tsutomu Soma, a senior manager at foreign securities at Okasan Securities.
The dollar fell to 88.20 yen, nearing its October low of 88.01 yen.
Traders cited talk of options around the 88 yen level, with expectations of some dollar buying before it gets there, and then sell stops below that level which could accelerate a drop if it gave way. The dollar hit a 13-year low of 87.10 yen in January.
The MSCI Japan index changes were announced on Nov. 11 so some traders were sceptical of the talk of yen supportive flows as a result of it at this stage.
The ICE Futures dollar index, which tracks the greenback against a basket of currencies, slipped 0.2 percent to 74.946, off a two-week high of 75.879 on Friday but above a 15-month low of 74.679 set earlier in November.
The euro neared the $1.50 barrier, which has proved a stumbling block this month, rising 0.1 percent to $1.4990 but slipping slightly on the day to 132.30 yen after a fall of about 0.5 percent on Tuesday.
The market has shown intra-day volatility this week, with gains made one day in yen crosses and risk-associated currencies against the dollar reversing completely in the next session as bookclosing ahead of the year-end makes trading jagged.
"These days the market has no clear direction. Every day the direction is different. One day risk assets are up, next day they are down," said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital.
Weekly jobless claims and other U.S. data will be released later on Wednesday, ahead of the holiday, with investors looking for clues on the state of the recovery after Fed meeting minutes showed officials increasingly confident the recovery will be durable.
The minutes also showed officials did not believe there had been speculative activity so far due to rock-bottom U.S. borrowing costs, saying the dollar's decline had thus far been "orderly".
One trader said macro funds seemed to have started increasing dollar-short positions as a result of the minutes.
The Australian dollar climbed 0.7 percent to $0.9255, although it remained well short of this month's 15-month high of $0.9407, while gold jumped to a fresh record above $1,175.
Construction work done in Australia rose 2.2 percent in the third quarter, against forecasts for a flat reading, and the market was pricing in a more than 70 percent chance that rates would rise by 25 basis points to 3.75 percent on Dec.1.
The Aussie also climbed 0.4 percent to 81.69 yen. Other currencies failed to make headway against the yen, with the New Zealand dollar flat and sterling falling. Both are close to the bottom of their recent ranges on the Japanese currency. (Additional reporting by Kaori Kaneko; Editing by Michael Watson) ((Email: charlotte.cooper@thomsonreuters.com; +81 3 6441 1870; Reuters Messaging: charlotte.cooper.reuters.com@reuters.net))