By Tamawa Kadoya LONDON (Reuters) - The yen rallied on Monday despite the Group of Seven singling out excessive volatility in the Japanese currency, while the dollar hit a two-year high against the euro as investors scrambled to shed riskier investments. The yen was hovering below 13-year peaks against the dollar but hit its highest since May 2002 against the euro. G7 finance authorities issued a statement saying it was concerned about recent excessive volatility in the yen and would continue to monitor markets closely, and cooperate as appropriate, raising the specter of coordinated currency intervention. The yen has surged sharply due to unwinding of carry trades, which use the low-yielding yen to buy everything from higher-yielding currencies to stocks and commodities. Such trades have collapsed in the past few weeks as market players have been forced to sell many assets to raise cash. The yen has struck a 13-year peak against the dollar, a six-year peak against the euro and many other milestones in its roughly 20 percent surge on a trade-weighted basis this month. .IBOXXFXJPY "We're just seeing more of the same... the G7 communique and Japan have issued various kinds of warnings, but if people are unwinding and they are distressed sellers, then they've got to do what they've got to do," a London-based trader said. Japanese finance minister Shoichi Nakagawa said on Monday that he was watching currencies with "great interest." But some analysts said that while the possibility of currency intervention was closer, it may still take time for authorities to act. "It was hardly a warning shot, it was more like saying we are aware of recent volatility ... we're not there yet for intervention," said Geoffrey Yu, currency strategist at UBS in London. While not ruling out intervention by Japanese authorities if the dollar sinks to 80-85 yen sharply, "the likelihood is that everything will be done through the G7 framework, that's what the U.S. Treasury wants," he added. At 6:12 a.m. EDT, the dollar was down 1.8 percent against the yen from late U.S. trade last week to 92.49 yen, pulling back after rising to near 94.50 yen after the G7 warning. On Friday the U.S. currency slid to a 13-year low of 90.90, according to Reuters data. The euro was down 3.4 percent at 114.95 yen, after hitting a near 6-1/2 year low of 113.64 yen. Against the dollar, the euro dropped more than 2 percent to a near 2-1/2 year low of $1.2335. The dollar has also soared against most other currencies, reaching a six-year high against the pound, as investors have unwound positions in many markets and boosted cash holdings in the greenback for investor redemptions. Meanwhile, the Reserve Bank of Australia continued to intervene in the currency market, buying Aussie dollar for U.S. dollar in Europe on Monday, traders said. The RBA confirmed it had intervened in foreign exchange markets on Friday and in Asian trade earlier in the global session to stabilize the flagging Australian currency. The Australian dollar shed 2.6 percent to $0.6069, back near a six-year low. Against the yen, the Aussie fell 1.3 percent at 56.2 yen after sinking to 55.11 yen on Friday -- the lowest since it was allowed to trade freely. Reaction was muted to data showing German corporate sentiment fell more than expected in October to its lowest level since May 2003. The Munich-based Ifo economic research institute said on Monday that its business climate index fell to 90.2 from 92.9 in September. (Reporting by Tamawa Kadoya; Editing by Victoria Main)

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