* U.S.-Japan wide rate differential one reason for yen weakness
* Japan's Kanda again warns on excessive FX moves
* U.S. new home sales slump to six-month low

By Gertrude Chavez-Dreyfuss and Harry  Robertson
       NEW YORK/LONDON, June 26 (Reuters) - The yen dropped to its
lowest against the U.S. dollar since late 1986 on Wednesday, amid a
wide interest rate differential between the two economies, keeping the
market alert for any sign of intervention from Japanese authorities to
boost its currency. 
    The U.S. dollar rose to as high 160.63, its strongest
level since December 1986. The greenback was last up 0.5% at 106.455
yen.
    Japan's low interest rate regime, compared to that of the United
States, has continued to hammer the yen. The 10-year Japanese
government bond yield was 1.03% on Wednesday, while the 10-year
Treasury yield was 4.304%.
    "The market seems to be front-running itself with respect to BOJ
(Bank of Japan) policy. But let's say the market is not doing that,"
said Eugene Epstein, head of structuring for North America at
Moneycorp in New Jersey.
    "Let's say they're not pushing the BOJ. Just the fact that
interest rate differentials are what they are between Japan and the
U.S., that would be the natural progression anyway," he said.
        So-called carry trade strategies, where investors borrow in
low-yielding currencies to invest in higher-yielding ones, have become
hugely popular as some countries have raised borrowing costs in recent
years.
    Although Japan has raised interest rates this year to a range of
zero to 0.1%, U.S. rates of 5.25% to 5.5% mean investors are flocking
to the higher returns on dollar assets, driving up the currency versus
the yen.
        Analysts said traders were testing the resolve of Japan's
Ministry of Finance and central bank, who spent $62 billion in late
April and early May to support the currency when it fell past 160.
    Japan's top currency diplomat Masato Kanda ramped up his warnings
on excessive currency moves on Wednesday, saying authorities were
"seriously concerned and on high alert" about the yen's rapid decline.
    "It is generally accepted that the current weakness in the yen is
not necessarily justified, therefore believed to be driven by
speculators," Kanda, the vice finance minister for international
affairs, told reporters. 

    
   "Perhaps a few months ago that would have been heeded more by the
market than it is now, because it's not being backed up by any change
in rates," said Joe Tuckey, head of FX analysis at broker Argentex.
    There is a chance of a further rate hike from the Bank of Japan in
late July, which could help support the yen. But any durable rally is
likely to require Federal Reserve interest rate cuts.
    The dollar index, which tracks the currency against six
peers, rose 0.2% to 105.92.
    U.S. new home sales came in weaker than expected. Sales of new
U.S. single-family homes dropped to a six-month low in May, falling
11.3% to a seasonally adjusted annual rate of 619,000 units last
month. The dollar showed little reaction to the data, which added to
growing evidence that the world's largest economy is slowing down. 
    Friday's U.S. personal consumption expenditures index (PCE), the
preferred Fed gauge on inflation, will be widely tracked to see
whether prices pressures in the economy are trending in the right
direction.
    A lower-than-expected number could cause traders to raise their
bets on Fed rate cuts this year, providing some relief to the yen.
    The euro slid 0.3% to $1.0686 after a European Central
Bank policymaker talked up the chances of further rate cuts this year,
a notably different stance from the Fed's Michelle Bowman.
    ECB governing council member Olli Rehn told Bloomberg that two
more cuts this year seemed "reasonable". That contrasted with Fed
Governor Bowman, who said she did not expect any U.S. rate cuts this
year.
    Elsewhere, Australian inflation accelerated to a six-month high of
4% in May, which had traders scrambling to price in a strong chance of
a further rate hike by November. The Aussie dollar was last up 0.2%
against the U.S. dollar at US$0.6659 .
    
    
    Sterling fell 0.3% to $1.2646 as the dollar strengthened.
    The yuan was also getting squeezed by the dollar's stubborn
strength, with China seemingly having signalled some tolerance for a
cheaper currency by gradually weakening the midpoint of the yuan's
daily trading range on the dollar.
    The yuan, which has hugged the low side of its band for months,
slumped to a seven-month trough on Wednesday of 7.2671 per dollar
. The dollar was little changed at 7.2667.
        
  
        
  
 Currency                                                          
 bid                                                              
 prices at                                                        
 26 June                                                         
 02:27                                                            
 p.m. GMT                                                         
 Descripti  RIC    Last      U.S.       Pct     YTD Pct  High     Low
 on                          Close      Change           Bid      Bid
                             Previous                             
                             Session                              
 Dollar     <=USD  105.97    105.67     0.3%    4.54%    106.13   105.
 index      >                                                     6
 Euro/Doll                                                    666
 Dollar/Ye                                                     705
 Euro/Yen                                                     86
 Dollar/Sw                                                    48
 Sterling/                                                     666
 Dollar/Ca                                                     51
 Aussie/Do                                                     636
 Euro/Swis                                                    62
 Euro/Ster                                                    34
 NZ                                                            76
 llar                                                             
 Dollar/No                                                       994
 Euro/Norw                                                    39
 Dollar/Sw                                                       833
 Euro/Swed                                                    399
 
    
 (Reporting by Gertrude Chavez-Dreyfuss in New York and Harry
Robertson in London; Editing by Emelia Sithole-Matarise and Bernadette
Baum)