* 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= 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.
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, 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, 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