FOREX-Dlr underpinned by higher yields, Aussie in focus

* Dlr steadies vs yen near 7-mth highs

* All eyes on RBA decision, pause could see Aussie drop

* Canadian dlr buoyed by higher commodity prices

SYDNEY, April 6 (Reuters) - The dollar steadied near 7-month highs against the yen on Tuesday, underpinned by a surge in U.S. Treasury yields, while the Australian dollar was strong ahead of an interest rate decision.

The Reserve Bank of Australia (RBA) announces its April policy decision at 0430 GMT and markets are pricing in a 70 percent chance of a 25-basis-point rate rise to 4.25 percent, the fifth hike since October.

Still, the RBA has surprised in the past and should it decide to pause at 4.0 percent, the Aussie could drop to below its 20-day moving average at $0.9165, from above $0.9205.

"It is a close call, with markets and analysts leaning towards a 25 basis point hike, suggesting that a no change decision could have a bigger impact on Aussie than a hike," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Indeed, latest data shows currency speculators remain very long on the Aussie, making a decision to pause an excuse for investors to trim some of those positions.

Net long positions for the Aussie stood at 69,340 in the week ending March 30, down slightly from 74,339 the week before, but neck and neck to a net 70,296 long positions for the Canadian dollar . [IMM/FX]

Instead, speculators have built large short positions against the yen in the week to March 30, swinging from long positions held just a week earlier.

The dollar steadied against the yen at 94.30 yen, not far from a seven-month high of 94.78 , with higher U.S. Treasury yields supporting the greenback.

The rise to around 4 percent in the 10-year U.S. Treasury note yield makes dollar-denominated Treasuries more attractive than comparable lower-yielding Japanese government bonds.

Also, U.S. data showed the economy's vast services sector grew last month at its fastest pace since mid-2006 added to optimism sparked by Friday's payrolls report, which showed employers added jobs in March at the fastest clip in three years.

All this is likely to add to the markets' view that the Federal Reserve will raise rate before its counterpart in Japan.

Dealers say the dollar's retreat from a high of 94.78 yen looks temporary with the fall limited to around 92.93 yen.

Traders said retracement could also be attributed to profit taking driven by expectations that China might be more inclined to allow the yuan to appreciate now.

U.S. Treasury Secretary Timothy Geithner said on Saturday he will delay an April 15 report on whether China manipulates its currency. Chinese President Hu Jintao is scheduled to visit Washington next week for a nuclear security summit. [ID:nN03183056]

There was a slight increase in market expectations for the currency to appreciate in yuan non-deliverable forwards . Many expect a move to let the yuan appreciate to lift most Asian currencies, including the yen.

Meanwhile, the euro edged lower to $1.3470, from $1.3477 late in New York on Monday, with support seen around $1.3460 and talk of a few stops below $1.3450. The euro also slipped to 126.97 yen , well below recent two-month highs of 127.90 yen.

The Canadian dollar was strong at C$1.0016, buoyed by strong commodity prices. The last time the Canadian dollar hit parity with the greenback, in July 2008, Canadian policymakers worried it would hurt the economy by making its exports more expensive. (Editing by Wayne Cole)