* Aussie sheds gains on investor profit-taking
* Japanese retail demand seen supporting cross/yen
* BOJ tankan survey shows Japanese firms less pessimistic
By Rika Otsuka
TOKYO, Oct 1 (Reuters) - The dollar was on the defensive on Thursday, having resumed its downtrend in the previous session as investors shifted funds out of the greenback and chased growth-linked currencies.
The Australian dollar, seen as a proxy to global growth in the currency market, remained the star performer. The Aussie hit a 14-month high against the U.S. currency above $0.8850, although dealers said it later erased those gains on investor profit-taking.
But the overall market was rangebound as major economic events lined up this week, dealers said.
"Market participants refrained from taking positions on one direction before key U.S. jobs data, the G7 meeting and also as the new quarter has just started," said Yuji Saito, head of the FX sales department at Societe Generale.
"The broad market trend is for dollar selling but some dollar short-covering is being seen before those economic events," he said.
The Group of Seven finance ministers and central bank governors will meet on Saturday on the sidelines of World Bank and International Monetary Fund meetings in Istanbul to discuss recent financial market developments and signs of recovery in the global economy.
Dealers said comments or news related to the dollar from the meeting could be a trigger for investors to cover short positions accumulated recently.
The Aussie has been helped by Australia's increasing business ties with China.
"The Australian dollar is enjoying its status as a big beneficiary of the solid Chinese economy," aid Hideki Amikura, deputy general manager of the forex section at Nomura Trust Bank.
"The Aussie could extend its rally to $0.9 as there are no negative factors preventing investors from buying at the moment."
Data showed on Thursday China's official purchasing managers' index (PMI) rose to 54.3 from 54.0 in August as a pick-up in new orders boosted both output and jobs.
The dollar edged up 0.3 percent from late U.S. trade to 89.94 yen, staying above an eight-month trough of 88.23 yen hit earlier this week on trading platform EBS. But offers from some Japanese exporters limited gains in the dollar, traders said.
The U.S. currency lost nearly 7 percent against the yen in the previous quarter just ended on Wednesday as investors dumped the dollar on a fall in U.S. Treasury yields. But against the closing level at the end of 2008, dollar/yen was down only 1 percent.
The euro inched down 0.1 percent to $1.4621 after it gained more than 4 percent in July-September.
Against the Japanese currency, the euro edged up 0.1 percent to 131.49 yen.
Traders said Japanese retail investors are expected to stay buyers of foreign currencies in the fourth quarter, though momentum could slow if Tokyo's Nikkei share average slides further below the key psychological 10,000 level.
The Nikkei was down 1.4 percent at around 9,987 in afternoon trade.
The Australian dollar hit a 14-month high of $0.8860 but quickly erased its gains to slide to $0.8802, down 0.4 percent on the day, as some players booked profits.
The Aussie has seen a brisk rise, buoyed by higher commodity prices and expectations that domestic interest rates will rise faster than other developed economies.
The Swiss franc, meanwhile, remained on the backfoot against the euro, having dropped the previous day on speculation the Swiss National Bank may have intervened to weaken its currency.
The market showed muted reaction after the Bank of Japan's closely watched quarterly tankan survey showed on Thursday Japanese business morale improved further as the economy picks up from its worst slump in decades, though it was still negative.
The headline index for big manufacturers' sentiment improved to minus 33 in September from minus 48 three month ago after having hit a record low of minus 58 in the March survey.
The big data piece in the United States is the ISM index and at 52.9 currently the index is at is highest since June 2007 and is forecast to rise to 54.0. The data is due at 1400 GMT.
Weekly jobless claims are also due along with some income and spending data for August. (Additional reporting by Anirban Nag in Sydney, Kaori Kaneko in Tokyo; Editing by Joseph Radford)