* Yen supported by Japan PM Abe's comments
* Sterling drops sharply after dovish BoE minutes
* RBNZ governor says New Zealand dollar overvalued
* Investors looking ahead of Fed minutes
By Anirban Nag
LONDON, Feb 20 (Reuters) - The yen was steady on Wednesday, holding to recent gains against the dollar and the euro after Japanese Prime Minister Shinzo Abe said the need to establish a public-private sector fund to buy foreign bonds had declined.
But sterling stole the limelight in the European session, tumbling to its lowest in more than 8 months against the dollar and a 16-month trough versus the euro after minutes from the latest Bank of England meeting showed policymakers were willing to ease policy further.
Investors will now turn to the release of minutes from the U.S. Federal Reserve's latest policy meeting. Any hint the Fed is getting closer to paring back its asset purchase scheme could help lift the dollar broadly.
Earlier, the dollar fell against the yen after Abe's comments mirrored those of his finance minister who has also played down such talk of the scheme. Foreign bond purchases would have helped push the yen lower, so suggestions that the Japanese are no longer considering this plan helped the yen.
Abe heads to Washington for talks with U.S. President Barack Obama later this week and where the yen's recent weakness is likely to be on the agenda. Analysts said Japan was stepping back from one of its more radical policy proposals with one eye on Washington.
Also with the uncertainty whether Abe can appoint a Bank of Japan chief who is more amenable to carry out aggressive monetary policy easing playing out, the yen is likely to find some respite from the constant selling pressure that it has been subject to since November.
"Given that the U.S. has been quite critical of Japan within the Group of Seven, and the market is short yen, we could see some position squaring before the talks," said Chris Turner, head of currency strategy at ING.
The dollar fell as low as 93.12 yen after Abe's remarks, before recovering to trade at 93.50 yen, almost flat on the day. It was still below a near three-year high of 94.465 hit on Feb. 11. The euro was flat at 125.20 yen.
The possibility of setting up a foreign bond-buying fund had been included in a campaign platform drawn up by Abe's Liberal Democratic Party ahead of a national election last December.
"I think he was told at the G20 ... 'don't you dare, don't you dare do that'," said Rob Ryan, a strategist for RBS in Singapore, referring to the idea of setting up the fund.
A G20 statement at the weekend reiterated a commitment by nations to refrain from competitive devaluations and stated monetary policy would be directed at price stability and growth.
NEW ZEALAND DOLLAR DROPS
But Reserve Bank of New Zealand governor Graeme Wheeler said on Wednesday that global imbalances and a weak U.S. dollar were driving up the New Zealand dollar and had left the currency overvalued compared to economic fundamentals.
The New Zealand dollar slid more than 1 percent to US$0.8358 after those comments.
"Currency wars are still what's driving markets, whether it's the RBNZ, or Japan talking about buying or not buying bonds," said Daragh Maher, currency strategist at HSBC.
"Even when we have juicier bits of data we are still worrying more about what BoJ members say and that's what's driving the yen."
At the Bank of England, which wants a weaker pound to drive exports and support growth, policymakers even considered a rate cut, the minutes showed.
All of which drove sterling to $1.5292, down 0.8 percent on the day to its lowest since early June. The euro rose to 87.645 pence, its highest since late October, 2011.
Against the dollar, the euro was flat on the day at $1.3375 , with investors waiting for more economic data, like flash euro zone PMI surveys on Thursday and the outcome of an Italian election at the weekend before taking fresh positions.
A fragmented parliament after Italy's Feb. 24-25 election may hamper the country's reform efforts and prompt investors to sell the euro.