FOREX -Yen takes breather vs dollar as short-covering rally loses steam

* Yen pulls back following short-covering rally

* US dollar still nursing post-payrolls headache

(Updates prices, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Jan 14 (Reuters) - The yen eased versus the dollar on Tuesday, taking a breather after having rallied broadly the previous day following a selloff on Wall Street and a further drop in U.S. Treasury yields.

The dollar rose 0.5 percent to 103.48 yen JPY= , regaining some ground after its 1.1 percent drop on Monday, when the dollar fell to as low as 102.85 yen, its lowest level in about a month.

The yen had surged on Monday as investors were forced to unwind stretched short positions in the Japanese currency in the wake of the poor U.S. jobs numbers last week and as U.S. stocks

.SPX posted the biggest one-day fall in more than two months.

Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said there may be some risk in the near term of a further unwinding of yen bearish bets that had been put on recently.

"The market had gone too far toward the year-end, and at the start of the new year," Okagawa said. The dollar will probably trade in a 102.00-104.50 yen range for this week, he added.

Sterling edged up 0.6 percent to 169.64 yen GBPJPY=R , after having shed 1.7 percent on Monday. The euro inched up 0.3 percent to about 141.39 yen EURJPY=R , recouping part of the 0.9 percent loss.

Analysts at BNP Paribas wrote in a note to clients that "bearish JPY remains a high conviction view for many market participants", adding that the dollar was likely to find buyers ahead of 101.50 yen.

Underscoring some of the headwinds against the yen, data on Tuesday showed that Japan's current account logged a record deficit in November as a bulging trade deficit weighed on the country's balance of payments. News Search ID:nL3N0KK22I

Traders, however, said the yen showed limited reaction to the data.

The dollar edged up 0.1 percent against a basket of major currencies to 80.618 .DXY . The dollar index had fallen to as low as 80.469 on Monday, its lowest level since Jan. 2.

The dollar had retreated after Friday's disappointingly soft payrolls report raised doubts about the health of the world's biggest economy, driving investors to push out the timing of the first hike in the Fed funds rate into late 2015 from mid-2015.

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The euro held steady at $1.3664 EUR= , treading water in the wake of its rally late last week that saw it pull away from a one-month low of $1.3548 set on Thursday.

The Australian dollar, which has benefited from the U.S. dollar's retreat after the weak jobs data, edged back from a one-month high set on Monday.

The Aussie dollar eased 0.2 percent to $0.9037 , down from Monday's high of $0.9087.

(Editing by Shri Navaratnam)

((masayuki.kitano@thomsonreuters.com)(+65 6417 4682)(RM:masayuki.kitano.thomsonreuters.com@reuters.net))

Keywords: MARKETS FOREX/