* Focus on U.S. debt limit debate could pressure dollar
* Investors trim short yen positions after new quake
* euro, Aussie may pull back further vs yen (Updates prices, adds quote)
By Gertrude Chavez-Dreyfuss
NEW YORK, April 11 (Reuters) - The dollar rebounded against the euro on Monday after steep losses on Friday as the U.S. government averted a potential shutdown, although the focus on the debt ceiling debate could limit the greenback's gains.
A rally in the dollar was also overdue after having been sold off versus the euro for the last four months. So far in April the dollar is still down more than 2 percent.
Currency traders have also started to talk about the U.S. government debt hitting its limit in a month's time, a scenario which should renew pressure on the dollar.
Expectations the Federal Reserve will lag other major central banks such as the European Central Bank and the Bank of England in raising interest rates could also undermine the U.S. currency.
"We're having some sort of relief rally after the U.S. government did not shut down as feared," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
"But I think gains in the dollar will be limited because the focus will be on the U.S. debt limit."
The United States is $95 billion away from reaching the statutory $14.3 trillion ceiling, according to the latest data. U.S. Treasury Secretary Timothy Geithner has asked Congress to raise that limit and failure to do so in a timely way would push interest rates higher and spark a "financial crisis potentially more severe than the crisis from which we are only starting to recover."
In midday New York trading, the euro fell 0.3 percent to $1.4437, after hitting a fresh 15-month high around $1.4486 last Friday. The high on electronic trading platform EBS was $1.4485.
But interest rate differentials between Europe and the United States, after last week's 25-basis-point increase by the ECB, were expected to continue to support the euro.
Euro zone-U.S. rate differentials widened to about 156 basis points on Monday, based on the March 2012 Euribor and Eurodollar contracts.
"With the ECB now in tightening mode, even if it is a gradualist approach and the Fed is still supplying more liquidity via its asset purchase program, the fundamental case for recent and future EUR/USD gains is pretty compelling," said Bob Lynch, currency strategist at HSBC in New York.
In addition, he said investors have largely become dismissive of the occasional hawkish rhetoric coming from some Fed officials. They're sensing that the doves on the FOMC, led by Fed Chairman Ben Bernanke and Fed Vice-chair Janet Yellen are the dominant and more important voices to consider when forecasting future monetary policy, Lynch said.
Some analysts like RBC's Watt, however, remained unconvinced about the euro's rally, especially after Portugal last week sought financial aid from the European Union and the International Monetary Fund.
Analysts said rate hikes by the ECB could hurt fiscally weak peripheral nations such as Spain, in terms of higher bank funding and mortgage costs.
YEN OFF ITS LOWS
The yen, meanwhile, was off an 11-month low against the euro and a 2-1/2-year trough versus the Australian dollar as yet another earthquake in Japan led some investors to pare bearish bets against the country's currency.
A fresh strong aftershock hit Japan on Monday, while the evacuation zone around its crippled nuclear plant was expanded because of high levels of radiation.
Traders said speculator positioning and some technical indicators suggested that rallies in the euro and Australian dollar against the yen could pause in the short run, with the latest in a series of quakes being used to book profits.
The euro was down 0.4 percent at 122.18 yen, well below its highest since May 2010 of 123.33 yen hit earlier on trading platform EBS. The Australian dollar was down 0.3 percent at 89.15 yen, having scaled a high of 90.04 yen, its strongest since September 2008.
Technical indicators such as the 14-day relative strength index and slow stochastics also suggested that the euro and Australian dollar are in overbought territory against the yen, pointing to the possibility of a near-term pull-back. (Editing by James Dalgleish)