FOREX-Dollar recovers, but gains limited as debt limit looms

* Focus on U.S. debt limit debate could pressure dollar

* Investors trim short yen positions after new quake

* Euro, Aussie may pullback further vs yen
(Recasts, updates prices, adds quote, changes dateline;
previous LONDON and byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 11 (Reuters) – The dollar rebounded on
Monday after steep losses on Friday, as the U.S. government
averted a potential shutdown, although the focus on the debt
ceiling debate could limit the greenback’s gains.

Currency traders have started to talk about the U.S.
government debt hitting its limit in a month’s time, a scenario
which should renew pressure on the dollar.

Expectations the Federal Reserve will lag other major
central banks such as the European Central Bank and Bank of
England in raising interest rates could also undermine the U.S.
currency.

“We’re having some sort of relief rally after the U.S.
government did not shut down as feared,” said David Watt,
senior currency strategist at RBC Capital Markets in Toronto.

“But I think gains in the dollar will be limited because
the focus will be on the U.S. debt limit.”

The United States is $95 billion away from reaching the
statutory $14.3 trillion ceiling, according to the latest data.
U.S. Treasury Secretary Timothy Geithner has asked Congress to
raise that limit and failure to do so in a timely way would
push interest rates higher and spark a “financial crisis
potentially more severe than the crisis from which we are only
starting to recover.”

In early New York trading, the euro (EUR=: Quote, Profile, Research) fell 0.3
percent at $1.4431, after hitting a fresh 15-month high around
$1.4486 last Friday. The high on electronic trading platform
EBS was $1.4485.

But interest rate differentials between Europe and the
United States, after last week’s 25 basis point increase by the
European Central Bank, were expected to continue to support the
euro.

“The ECB hike and subsequent press conference did not bring
many surprises, but the sustained upward pressure on EUR/USD
suggests that net long positions may have been built further
since,” Danske Bank said in a note.

However, some analysts like RBC’s Watt remained unconvinced
by the euro’s rally, especially after Portugal last week sought
financial aid from the European Union and the International
Monetary Fund.

Analysts said interest rate increases by the ECB could hurt
fiscally-weak peripheral countries such as Spain, in terms of
higher bank funding and higher mortgage rate for the broader
economy.

“So you’re looking at the euro, and it’s at $1.44. You sort
of ask whether that is a level that makes sense given that the
EU periphery issues have not gone away,” said RBC’s Watt.

YEN OFF ITS LOWS

The yen, meanwhile, was off an 11-month low against the
euro and a 2-1/2 year trough versus the Australian dollar on
Monday, as another earthquake in Japan led some investors to
pare bearish bets against the country’s currency.

A fresh strong aftershock hit Japan on Monday, while the
evacuation zone around its crippled nuclear plant was expanded
because of high levels of accumulated radiation.
[ID:nL3E7FA058]

Traders said speculator positioning and some technical
indicators suggested that rallies in the euro and the
Australian dollar against the yen could pause in the short run,
with the latest in a series of quakes being used by some to
book profits.

The euro was down 0.5 percent at 122.06 yen (EURJPY=EBS: Quote, Profile, Research),
well below its highest since May 2010 of 123.33 yen hit earlier
on trading platform EBS. The Australian dollar was down 0.3
percent at 89.17 yen (AUDJPY=R: Quote, Profile, Research), having scaled a high of 90.04
yen earlier, its strongest since September 2008.

Technical indicators such as the 14-day relative strength
index and slow stochastics also suggested that the euro and
Australian dollar are in overbought territory against the yen,
pointing to the possibility of a near-term pull-back.

(Additional reporting by Anirban Nag in London)
(Editing by Theodore d’Afflisio)

FOREX-Dollar recovers, but gains limited as debt limit looms