* Short-covering, profit-taking help lift dollar
* Rise in longer-term US bond yields may support dlr-trader
* IMM speculators' bets vs dollar off peak but still large
By Masayuki Kitano
TOKYO, Oct 18 (Reuters) - The dollar rose against a basket of currencies on Monday and pulled away from a 10-month low, with market players saying the short-covering bounce may have more room to run given the recent build-up of bets against the dollar.
The greenback extended a rebound that started late last week, with the euro retreating further from an eight-month high and the Australian dollar backing off from Friday's peak above parity that was the highest since it was floated in 1983.
Investors had increased their bets against the dollar in recent weeks on heightened market expectations for the U.S. Federal Reserve to unveil a second round of quantitative easing as early as November. That positioning had pointed to the risk of a short-covering bounce in the dollar.
"I think everyone was just looking for some kind of trigger. The only question had been one of timing," said Tsutomu Soma, senior manager for Okasan Securities' foreign securities department.
Market players were likely trimming back their bets against the dollar ahead of a forthcoming G20 meeting and before hedge funds' book closings at the end of November, Soma said.
The dollar index rose 0.5 percent to 77.402, having hit a 10-month trough of 76.144 on Friday.
The euro shed 0.7 percent to $1.3881, pulling away from its highest in more than eight months of $1.4161 hit on trading platform EBS on Friday.
The latest data from the U.S. Commodity Futures Trading Commission showed that speculators trimmed bets against the dollar in the latest week but still had hefty bets against the U.S. currency.
The value of the dollar's net short position slipped to $29 billion in the week ended Oct. 12, down from a net short of $30.5 billion in the previous week, the biggest bet against the dollar since at least June 2008.
"Expectations of QE2 are fully priced in for November or December. Questions remain exactly on the extent of that QE2," said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong.
"Overall, with the downside and the bad news pretty much fully factored in for the U.S. dollar, the risk is towards more of a dollar squeeze, especially given how skewed positioning is ultimately," Trinh added.
DOLLAR AND TREASURY YIELDS
The Australian dollar fell 0.6 percent to $0.9847. The Aussie rose to $1.0004 on Friday, climbing above parity for the first time since it was floated in 1983.
A senior trader for a major Japanese bank said the dollar could draw support in the near-term if longer-term U.S. Treasury yields continue to rise after climbing late last week.
The dollar's moves have recently been highly correlated with 10-year Treasury yields.
For example, the 90-day correlation between the 10-year Treasury yield and the dollar index is now at 0.77, near a peak hit earlier in October that was the highest since April 2009.
"I think there is a good chance that we may see a pull-back in European currencies and the Australian dollar," said the senior trader for a major Japanese bank.
Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further, and the U.S. yield curve steepened as investors bet the Fed would be successful in generating more inflation.
MACD, a technical indicator used to gauge short-term trading momentum, is now flashing a sell signal for both the euro and the Australian dollar, pointing to the potential for a further pull-back in those currencies.
The dollar dipped 0.1 percent against the yen to 81.36 yen, edging back toward a 15-year low of 80.88 yen hit on EBS last week.
The senior trader for a major Japanese bank said that, while the potential for yen-selling intervention remained, he harboured doubts about just how strongly the Japanese authorities may feel a need to do so, given that the yen's recent rise could be blamed on broad dollar weakness.
Some market players have also speculated that Tokyo may prefer to avoid intervention ahead of a Group of 20 finance ministers' meeting in South Korea from Oct. 22. (Editing by Joseph Radford) (Additional reporting by Charlotte Cooper in Tokyo, Wayne Cole in Wellington;)