FOREX-Yen shorts trimmed on risk pullback; downtrend intact

* Yen rises as Japan upgrades severity of nuclear crisis

* Speculators trim carry positions but demand to buy dips

* Sterling hit as weaker inflation dents rate hike chances

(Adds quote, detail, updates prices)

By Neal Armstrong

LONDON, April 12 (Reuters) – The yen strengthened on Tuesday
as investors bought the currency to cover bets against it after
Japan upgraded the severity of its nuclear crisis, but was seen
returning to its weakening trend as carry trade demand resumes.

Sterling fell after weaker-than-forecast UK inflation data
dented the chances for a Bank of England rate hike in the
near-term.

Japan raised the severity of its nuclear disaster to the
highest level — on a par with the Chernobyl disaster of 1986 —
citing accumulated levels of radiation released. [ID:nL3E7FB2TZ]

The news prompted some speculators to book profits on carry
trades, where investments in riskier assets are funded by
short-selling the yen.

World stocks (.MIWD00000PUS: Quote, Profile, Research) retreated on the Japanese
warning, while U.S. bellwether stock Alcoa (AA.N: Quote, Profile, Research) fell 3
percent in after hours trade as first quarter revenues missed
targets, prompting some unwinding in riskier assets.

“Our positioning data shows some carry trades are pretty
extended and this increases the risk of a blowout,” said Chris
Walker, currency strategist at UBS.

“But the broader trend for increased risk should remain as
the market focuses on leading indicators. If U.S. sentiment
continues to improve and risk appetite is stable this will keep
carry trades going,” said Chris Walker, currency strategist at
UBS.

Group of Seven (G7) intervention to weaken the Japanese
currency has fuelled yen selling to fund carry positions.
Expectations the Bank of Japan will keep policy loose to help
the economy rebound from last month’s devastating earthquake
have also hit the yen.

The U.S. dollar was down 0.3 percent at 84.30 yen (JPY=: Quote, Profile, Research)
paring earlier losses after running into technical support at
its 200-day moving average just below 83.50. Japanese real-money
accounts were dollar/yen buyers, while offers were reported at
84.50.

The euro was down 0.3 percent at 121.90 yen (EURJPY=R: Quote, Profile, Research),
bouncing strongly off earlier lows of 120.16. The high-yielding
Australian dollar slipped 0.5 percent to 88.38 yen (AUDJPY=R: Quote, Profile, Research),
after rising to its highest levels since September 2008 on
Monday.

“The market wanted to scoop up the yen crosses on extremes,
hence the rebound this morning,” said a London-based spot
trader.

“Ichimoku support in euro/yen held at 120.03 and even if we
were to see a break below there I cannot see the move extending
much past 119.60 unless euro/dollar takes a plunge.”

The euro (EUR=: Quote, Profile, Research) rose 0.2 percent against the dollar to
$1.4465, bringing it back towards a 14-month high of $1.4490 hit
on Friday. Traders said Asian sovereigns were the main buyers,
while the January 2010 high of $1.4582 was key resistance.

A fall in German analyst and investor sentiment in April had
little currency impact. [ID:nLDE73A1SN]

STERLING FALLS

The dollar index (.DXY : Quote, Profile, Research), which tracks the greenback against
a basket of major currencies was down slightly at 74.971, near a
16-month low of 74.838 hit on Friday.

Dovish comments from key U.S. Federal Reserve officials the
previous day indicated the Fed is not in any hurry to tighten
policy, likely limiting the greenback’s upside potential in the
near future. [ID:nN11296347]

Sterling fell to a five-month low versus the euro
(EURGBP=D4: Quote, Profile, Research) and a one-week trough against the dollar (GBP=D4: Quote, Profile, Research)
after annual inflation came in at 4 percent versus expectations
for 4.4 percent, its lowest annual increase since January.
[ID:nAHLBFE7FK]

Expectations for a rate rise from the Bank of England were
pushed back to October. (BOEWATCH: Quote, Profile, Research)
(Editing by Catherine Evans/Chris Pizzey)

FOREX-Yen shorts trimmed on risk pullback; downtrend intact