* Sell-off in yen and dollar halts as market books profits
* Fed officials sound dovish, negative for dollar
* Extended Aussie, Canadian dollar rally finally pauses
* Sterling awaits UK inflation data for direction
By Hideyuki Sano
TOKYO, April 12 (Reuters) - The yen rose sharply on Tuesday
and was the biggest gainer among major currencies over the past
24 hours as profit-taking on bets against it gathered momentum
after Japanese authorities upgraded the nuclear crisis to a par
with Chernobyl and several strong aftershocks hit Japan.
Declines in oil prices also prompted investors to exit
positions in commodity-linked currencies.
The U.S. dollar, like the yen, found some reprieve as
speculators locked in profits from positions taken against the
low-yielding currency in favour of the euro and red-hot
commodity plays such as the Australian dollar.
Traders said both the yen and the dollar will likely resume
sliding, however, after the profit-taking has run its course.
"When there are uncertainties, you just close your
positions. At the moment, what a lot of people have is yen short
positions so the yen is being bought back. But I don't see any
change in the yen's downtrend," said a trader at a U.S. bank.
The yen had been sliding after the Group of Seven (G7)
countries sold the currency in last month's rare joint
intervention -- their first in more than a decade.
Expectations that the Bank of Japan will keep policy loose
to help the economy rebound from last month's devastating
earthquake and tsunami, even as other central banks tighten to
avert inflation, also had made many market players comfortable
selling the yen, since higher yielding currencies tend to be
favoured by investors in the long run.
As speculators bought back the yen, especially against
higher-yielding currencies such as the Australian dollar and the
euro, the yen gained about 1.0 percent against the dollar, about
1.2 percent against the euro and 1.6 percent against the
Australian dollar.
The U.S. dollar fell to 83.80 yen per dollar , off a
seven-month high of 85.54 set on Thursday. It has managed to
bounce near its 200-day moving average at 83.51 yen, although a
break of that could pave the way for a test of 81.98 yen, a 38.2
percent retracement of its rise from a record low set last
month.
The euro slipped to 120.80 yen , down from
Monday's peak of 123.33. The Australian dollar eased to 87.50
yen , having scaled a high of 90.02, its strongest
since September 2008, hit on Monday.
"Aftershocks in Japan hampered overall risk sentiment,
helping JPY to be the top performer overnight, even amid reports
that the estimate of the severity of the Fukushima accident
could be increased," said David Watt, strategist at RBC.
Japan raised the severity of its nuclear disaster to the
highest level on Tuesday, citing accumulated levels of radiation
released. []
The U.S. dollar had the upper hand against other currencies,
gaining 0.6 percent against the Aussie, 0.5 percent against the
Canadian dollar and 0.2 percent against the euro.
EYEING INFLATION
The dollar index <.DXY >, which tracks the greenback against
a basket of major currencies, posted a slim gain to stand at
75.111, having found support after plumbing a 16-month low of
74.838 on Friday.
The euro retreated from Friday's 15-month high around
$1.4485 to $1.4400, but traders say the January 2010 high of
$1.4582 remains in play.
The Australian dollar fell to $1.0433, off a
29-year peak of $1.0585 set Friday. The Canadian dollar dropped
to C$0.9600 per U.S. dollar , compared with a 3 1/2-year
high of C$0.9526 hit last week.
But dovish comments from key U.S. Federal Reserve officials
the previous day indicate that the U.S. Federal Reserve is not
in any hurry to tighten its policy, likely limiting the
greenback's upside potential in the near future.
Two of the Fed's most powerful officials, Janet Yellen and
William Dudley, said on Monday that the U.S. central bank should
stick to its super-easy monetary policy, arguing that inflation
is not a threat and unemployment remains too high.
[]
"With the Fed's accommodative policy intact for some time,
USD weakness is likely to persist. Thus, the small correction
seen across the board indicates more profit-taking than the
start of a trend," BNP Paribas analysts wrote in a note.
Many traders also expect the yen to stay under pressure from
low yields, after the knee-jerk reaction to the aftershocks has
passed.
Kimihiko Tomita, head of foreign exchange at State Street
Global Markets in Tokyo, said the yen's fall in the past month
had been largely driven by speculators as many institutional
investors typically need some time to assess their strategies
after a big incident.
"We've seen unexpected factors such as Libya and the
disaster in Japan. At a time like this, when there were sudden
big changes, it is speculators and not investors who can quickly
move," Tomita said.
"Foreign investors have bought Japanese shares for many
years. If they start selling them, that could push down the yen
further," Tomita added.
But Daisuke Uno, chief strategist at Sumitomo Mitsui Banking
Corp, said the yen could gain further against a broadly weak
dollar if the G7 finance ministers' meeting shows a gap between
Japan and other G7 partners on the G7 commitment to yen.
"Japan wants continued commitment to the yen but other G7
countries may want to limit joint intervention to a one-day
event. If that picture is brought home to market players, the
yen could test 80 yen," says Uno, one of the most dollar-bearish
analysts.
Markets are next eyeing inflation data, with
Germany, Spain and the United Kingdom among those releasing
reports on Tuesday. U.S inflation data is due on Thursday and
Friday.
In Britain, the annual consumer price inflation rate is
forecast to hold steady at a 28-month high of 4.4 percent, more
than double the central bank's target.
Another upside surprise would fuel talk of an imminent rate
hike, giving sterling a fillip. The pound was down 0.3 percent
at $1.6284 , having reached a 15-month high of $1.6430
on Friday.
(Additional reporting by Ian Chua in Sydney, Natsuko Waki in
Tokyo; Editing by Edmund Klamann)
