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FOREX-Yen rallies as downing of Malaysian jet stokes geopolitical risk

* Malaysian jet downing drives U.S. yields lower and buoys yen

* Dollar/yen posts biggest one-day loss since early April

* Yen hits five-month high against euro

By Shinichi Saoshiro

TOKYO, July 18 (Reuters) - The yen marched to a five-month high versus the euro and rallied against the dollar on Friday, as news of a Malaysian airliner being downed over Ukraine and escalating conflict in Gaza boosted the safe-haven currency.

A Malaysian passenger jet was brought down over eastern Ukraine on Thursday, killing all 298 people aboard and sharply raising the stakes in a conflict between Kiev and pro-Moscow rebels in which Russia and the West back opposing sides.

Separately, Israel announced the start of a ground campaign in Gaza on Thursday after 10 days of aerial and naval bombardments failed to stop Palestinian rocket attacks.

Rising geopolitical concerns hurt risk assets such as equities and sent investors to the relative safety of U.S. Treasuries, driving government debt yields lower and pushing the yen up against the dollar.

The S&P 500 posted its biggest one-day percentage drop since April in wake of news of the Malaysian Airlines jet crash.

"Put simply U.S. Treasury yields declined on heightened geopolitical woes and hurt dollar/yen, which has a high correlation with yields," said Masafumi Yamamoto, market strategist at Praevidentia Strategy in Tokyo.

"The yen is being bought but not through the flight-to-quality type bids seen in the past. The yen does not offer as much quality anymore since Japan is becoming a nation with a current account deficit and inflation is taking root."

The dollar stood little changed at 101.205 yen after sliding nearly 0.5 percent overnight to post its biggest one day loss since early April. A break below 101.06 yen would take the greenback to a two-month low.

The euro, which has lost roughly 0.9 percent against the yen so far this week, hovered near a five-month low of 136.715 yen touched earlier in the session.

The euro hovered within a short distance of $1.3512, its lowest in a month against the U.S. currency.

(Editing by Eric Meijer)