* Markets positioning for bold action from BOJ
* Yen hits 2-1/2 year low vs USD, 20-mth trough vs euro
* Kiwi dollar knocked lower by tame inflation numbers
* China data. including GDP. next in focus
By Ian Chua
SYDNEY, Jan 18 (Reuters) - The yen languished at two-and-a-half year lows against the dollar on Friday following a dramatic selloff as markets positioned for the Bank of Japan to take bold policy action to tackle deflation.
Sources familiar with the BOJ's thinking told Reuters the central bank, under relentless pressure from Prime Minister Shinzo Abe, will next week mull pledging to buy assets open-endedly until 2 percent inflation is foreseen.
Such a move would represent a marked turnaround for a conservative central bank that has repeatedly resisted calls for bold action. It would also far exceed expectations the BOJ would opt for a more conventional step of topping up its asset-buying programme at its Jan 21-22 meeting.
The dollar gained two full yen to a high of 90.14, a level not seen since mid-2010, while the euro soared 3 yen towards a 20-month high of 120.62. Both currencies were trading near their overnight highs in early Asian dealings.
Initial resistance for dollar/yen is seen around 90.34, the 76.4 percent retracement of its May 2010-Oct 2011 fall. A break there brings the 2010 high of 94.99 in focus.
The Australian dollar scaled a four-year peak around 95.00 yen.
Traders said the risk now, of course, is if the BOJ undershoots expectations.
"We think there is some risk of disappointment at the BOJ meeting and scope for a yen rally. It is now consensus that the BOJ will move to a 2 percent inflation target. However, more aggressive measures may not come until closer to the nomination of the new governor/deputy governors in Q2," said Kiran Kowshik, strategist at BNP Paribas.
The dollar also lost ground against the euro and higher yielding currencies, such as the Australian dollar, after upbeat data on U.S. housing starts and jobless claims spurred demand for riskier assets.
The euro last traded at $1.3375, within a hair's breadth of an 11-month high of $1.3404 set Monday, while the Australian dollar was at $1.0547, reversing Thursday's fall sparked by a local labour force report.
Further upside now hinges on key economic data out of China due around 0200 GMT. Confirmation that growth in the world's second biggest economy had accelerated would no doubt help bolster risk assets.
The New Zealand currency, however, suffered a setback after data showed consumer prices at home fell unexpectedly in the fourth quarter, keeping the annual rate close to a 13-year low.
The outcome meant the Reserve Bank of New Zealand could keep interest rates at a record low for longer.
"We expect inflation will remain lower over the next two quarters, so the risks are that the Reserve Bank will be on hold a little bit longer than our December call," said Nick Tuffley, chief economist at ASB Bank.
The kiwi lost a full U.S. cent in the wake of the data, briefly reaching a low of $0.8324, before edging back to $0.8365.