* Dollar steady after traders cover short positions
* Higher-yielders down after profit-taking
* Euro stabilises after biggest fall since early August
By Charlotte Cooper
TOKYO, Oct 27 (Reuters) - The dollar kept its footing on Tuesday after sharp gains the previous day, but made little progress higher as investor selling of stretched higher-yielding currencies and the euro paused.
The euro had its steepest drop since early August on Monday, falling nearly 1 percent, and the dollar index posted its best daily gain since September as investors unwound short dollar positions after a sharp fall in stocks and commodities.
Traders and analysts said a rise in U.S. Treasury yields was also supporting the greenback. The 10-year note yield rose to its highest level in two months the previous day as the market fretted about a record debt sale this week and about when the Federal Reserve might start reversing its easy policy.
Stock markets around Asia were showing red after falls of 1 percent on Wall Street and commodity-linked currencies such as the Australian dollar, which has soared to its highest since August 2008 this month, were on the back foot.
"A corrective move in equity markets and upward pressure on U.S. yields are bad for commodity currencies and good for the dollar," said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital in Tokyo.
The euro was steady from late U.S. levels at $1.4864 but well down from a 14-month peak of $1.5064 hit on Monday after an opinion article from China suggested the Asian giant should lift the share of the euro and yen in its foreign exchange reserves.
Traders expected chart support for the euro at $1.4850 and $1.4830, with a break of the latter opening the way to $1.4675.
The dollar has been a favoured trade to sell against higher-yielding currencies this year, with the prospect of low U.S. rates for a prolonged period undermining it.
Data late last week showed currency speculators increased their bets against the dollar in the week to Oct. 20 with the value of net short positions rising to $18.65 billion from $17.99 billion a week earlier..
That heavy short positioning made investors hesitate to sell the dollar further, analysts said, creating conditions for a pullback.
"The correction in the euro and the Aussie were long due given the stretched long positions," said Anthony Gray, head of the risk solutions department at Travelex in Sydney.
The dollar index, a measure of the greenback's performance against six major currencies, was steady on the day at 76.038, above a 14-month low of 74.94 set last week.
The dollar hit its highest in a month against the yen, touching 92.33 yen before edging back to stand flat on the day at 92.10 yen. It hit an eight-month low of 88.01 early in October, not far off last January's 13-year low of 87.10.
"For dollar/yen it's tricky, but rising U.S. yields and a general buyback for the dollar is supportive for dollar/yen and justifies further liquidation of yen long positions," Yamamoto said.
A trader at a Japanese bank said there was talk of dollar selling ready at 92.30-50, capping it for now.
The Australian dollar edged up from a low of $0.9125 on good support from buyers around that level and was holding at $0.9180, below last week's 14-month high at $0.9330.
It is likely to be supported by speculation on whether rates will move up by 25 or 50 basis points next month, after Australia's central raised rates earlier in October.
Investors are likely to stay wary ahead of U.S. consumer confidence numbers for October and house price index data for August, both due later in the day. Also, the market is waiting to see third-quarter U.S. gross domestic product data on Thursday.
Analysts expect the U.S. economy to expand 3.3 percent in the third quarter. Anything lower, like shock GDP numbers from the UK late last week, could trigger another wave of selling in riskier assets. (Additional reporting by Anirban Nag in Sydney; Editing by Chris Gallagher)