* 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 The yen gained sharply on Tuesday, the most of all major currencies during the past 24 hours, as profit-taking in bets against it gathered momentum after Japanese authorities put the level of the nuclear crisis on par with Chernobyl and after a series of strong aftershocks, while declines in oil prices also prompted investors to exit from commodity currencies.
Like the yen, the U.S. dollar found some reprieve as speculators locked in profits from their bets against the low-yielding currency in favour of the euro and red-hot commodity plays like the Australian dollar, though traders said both the yen and the dollar looked set to resume sliding after the profit-taking had 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 gained about 1.0 percent against the dollar, about 1.3 percent against the euro and more than 1.7 percent against the Australian dollar.
The U.S. dollar fell to 83.80 yen per dollar , off a seven-month low of 85.54 set on Thursday. The euro slipped to 120.58 yen , down from Monday's peak of 123.33. The Australian dollar eased to 87.27 yen , having scaled a high of 90.04, 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.[ID:nL3E7FB2TZ]
The U.S. dollar had the upper hand against other currencies, gaining 0.5 percent against the Aussie, 0.4 percent against the Canadian dollar, and 0.2 percent against the euro.
The dollar index <.DXY >, which tracks the greenback against a basket of major currencies, last traded at 75.111, up slightly on the day and having found some 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 $1.4407, but traders say the 2010 January high of $1.4582 remains in play. The Australian dollar fell to $1.0445 on the day and off a 29-year peak of $1.0585 set Friday. The Canadian dollar dropped to C$0.9600 per the U.S. dollar , compared to 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 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 the U.S. central bank should stick to its super-easy monetary policy, arguing inflation is not a threat and unemployment remains too high. [ID:nN11296347]
"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.
The yen's downtrend is also seen firmly in place. The Japanese currency has been on a slippery slope since last month's joint G7 intervention to curb runaway yen gains.
The Bank of Japan's ultra-loose monetary stance and prospects of more easing have also made the yen the funding currency of choice in carry trades.
Kimohiko Tomita, head of foreign exchange at State Street Global Markets in Tokyo, said the yen's fall in the past month has 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.
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 the UK, the annual consumer price inflation rate is forecast to hold steady at the 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 Friday.
(Editing by Edwina Gibbs)