By Kevin Buckland
TOKYO, Jan 21 (Reuters) - The safe-haven yen gained while riskier bets like the Australian dollar and cryptocurrencies slid on Friday amid rekindled fears of heated inflation and aggressive Federal Reserve policy tightening.
The dollar took a breather from recent gains as a rally in U.S. Treasury yields stalled, but was still headed for its best week in a month against a basket of major peers ahead of a Federal Reserve policy meeting next week.
The Aussie - often considered a liquid proxy for risk appetite - sank as much as 0.99% to 81.67 yen, its weakest level in a month, and was last down 0.50% at $0.71900 .
The greenback slipped 0.27% to 113.78 yen, a one-week low.
"We're at the mercy of risk sentiment, and dollar-yen seems to want to track equity markets," said Bart Wakabayashi, Tokyo Branch manager of State Street Bank and Trust.
"There's a bit of surprise that we're back on a 113 handle, which could be an overshoot. I don't think there's a lot of consensus that this is a sustainable direction for dollar-yen" amid the policy divergence between a hawkish Fed and a still dovish Bank of Japan, he said.
"Just a couple of months ago we were debating if there'd be a Fed hike in March, and now we're debating if there will be a 50-point hike in March. Things have changed very quickly."
Overnight, Wall Street suffered a sharp selloff in the final hours of trading, while Treasury yields retreated from multi-year highs. S&P 500 futures point to a further 0.7% decline at the reopen.
The advance in U.S. yields has been driven by market expectations that the Fed will tighten monetary policy at a faster pace than anticipated, with Fed funds futures now fully priced for a rate increase in March and a total of four in 2022.
The Federal Open Market Committee (FOMC) convenes a two-day policy meeting starting on Tuesday, at the conclusion of which market participants will closely parse the committee's statement regarding the tightening timeline.
The dollar index - which measures the currency against six rivals - eased 0.05% to 95.714 after touching a more than one-week high of 95.864 on Thursday. For the week, it is up 0.58%, rebounding from last week's 0.61% slide.
The euro rose 0.11% to $1.13225, climbing off its weakest level since Jan. 10. European Central Bank President Christine Lagarde speaks on a panel at the World Economic Forum later in the day about the global economic outlook.
Sterling was about flat at $1.3589, hovering near its lowest since Jan. 11.
In cryptocurrencies, Bitcoin tumbled as much as 6.1% to $38,250 for the first time since early August, while smaller peer ether dropped as much as 6.43% to $2,806.70, the lowest since late September.
Many analysts predict the dollar has further to rise as Fed tightening gets underway, despite recent volatility.
The currency "should continue to firm into next week's FOMC," strategists at Westpac wrote in a client note, saying they wouldn't be surprised if the dollar index tops its 2021 high at 96.938.
"Admittedly, a lot is priced in now," they wrote, "but a straight comparison of (the dollar index) vs yield spreads shows that the USD has not fully priced in this story."
(Reporting by Kevin Buckland; Editing by Gerry Doyle and Kim Coghill)