FOREX-Dollar briefly climbs 7-yr peak on yen as Japan sinks into recession

* Dollar/yen initially jumps to 7-yr high on weak Japan GDP

* But pair hands back gains as Tokyo stocks slide

By Shinichi Saoshiro

TOKYO, Nov 17 (Reuters) - The dollar briefly scaled fresh seven-year high against the yen on Monday after data showed Japan's economy unexpectely slipped into recession, but the U.S. currency came off its peak as the yen was bought back following a retreat in Tokyo stocks.

Data on Monday showed Japan's economy shrank an annualised 1.6 percent in July-September, confounding expectations for a modest rebound and solidifying the view premier Shinzo Abe will call a snap election and delay a second sales tax hike next year.

The dollar jumped to a new seven-year high of 117.06 yen in a knee-jerk reaction to the GDP numbers but quickly pulled back to 116.47 yen as Tokyo's Nikkei slid more than 1 percent.

"Dollar/yen has been moving recently in close relationship with (Japanese) equities so the Nikkei's fall knocked the pair from its highs," said Masafumi Yamamoto, a market strategist at Praevidential Strategy in Tokyo.

"The GDP data was so unexpectedly weak and clouded many prospects taken for a given," he said.

Many participants, particularly foreign players, have sold yen to hedge their positions in Japanese equities.

The Nikkei had rallied to a seven-high peak last week, helped by speculation of the unpopular tax hike plans being delayed and that an Abe win at a snap election may result in a second round of reflationary policies.

The euro edged up 0.1 percent to $1.2535 as the dollar pulled back from its highs against the yen.

The euro had already posted modest gains against the dollar overnight as Treasury yields rose after a component of the Thomson Reuters/University of Michigan sentiment index showed a decline in Americans' expectations for long-term inflation.

The dollar index, gauge of the greenback's strength against a basket of key currencies, was little changed at 87.511, pulling back from an intraday high of 87.626 hit early in the Asian session.

The Swiss franc traded near a 26-month high of 1.2011 against the euro, edging ever closer to the Swiss National Bank (NYSE: NBHC - news) 's three-year-old cap of 1.20 francs per euro. (Editing by Shri Navaratnam)