FOREX-Dollar up vs yen, euro recovers on higher stocks

* Dollar holds above 90 yen as short positions trimmed

* Euro recovers vs dollar as Europe shares rise 1 percent

* Sterling slammed on report rates to stay low

* Focus on U.S. third-quarter earnings later in week

By Tamawa Desai

LONDON, Oct 12 (Reuters) - The dollar hit a two-week high against the yen on Monday with traders covering short positions in the U.S. currency as they debated the timing of tightening in U.S. monetary policy.

Despite its gains against the yen, dollar sentiment remained bearish, and it relinquished early gains against the euro, after a 1 percent rise in European shares <.FTEU3> prompted some demand for riskier assets.

The dollar remains under selling pressure due to factors including large deficits and concern about the U.S. currency's status as the pre-eminent reserve currency.

Analysts said the dollar's rise on Monday was mainly an adjustment of short positions in the currency which were shown to have been piling up last week.

"The dollar has pulled away from its lows late last week, but it remains to be seen whether it was anything other than a short squeeze," said Tom Levinson, currency strategist at ING.

By 1024 GMT, the dollar was 0.5 percent higher compared with late Friday levels at 90.30 yen . It rose as high as 90.46 yen, its strongest since the start of the month and up from an eight-month low of 88.01 yen hit last week.

The euro rose 0.2 percent to $1.4755 , recovering from a slide to the day's low of $1.4677. The single European currency rose 0.8 percent against the yen to 133.20 yen .

Activity was light with Tokyo markets shut for a one-day holiday and a federal holiday in the United States.

Sterling fell broadly, hitting a six-month low against a basket of currencies after a report said British interest rates would stay at rock-bottom levels for some time.

The Centre for Economics and Business Research (CEBR) said British interest rates would stay at 0.5 percent until 2011 and not rise to 2 percent until 2014. [ID:nLB53176]

INTEREST RATES

A surprise rate hike by Australia last week put renewed market focus on the direction of interest rates.

The dollar rebounded after U.S. Federal Reserve Chairman Ben Bernanke said on Thursday that U.S. policy could be tightened as a recovery takes hold.

His comments also led to a sell-off in Treasuries, with 10-year U.S. government bond yields hitting two-week highs. Fed fund futures moved to price in a funds rate of around 0.3 percent in the March contract <0#FF:>, up from near zero at the moment.

St Louis Fed President James Bullard added to the debate on Sunday, saying medium-term inflation risks in the U.S. economy could be higher than thought.

Later in the week, traders will focus on financial earnings, with results from JP Morgan Chase and Goldman Sachs scheduled. [RESF/US]

"Earnings should be broadly supportive for risk-taking," said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.

U.S. data this week include September retail sales and consumer prices as well as industrial and manufacturing numbers.

The dollar index <.DXY>, a measure of the greenback against six major currencies, slipped 0.2 percent to 76.302. It had hit a 14-month low of 75.767 last week.

The Australian dollar hit a two-month high of 81.87 yen and hovered near last month's 14-month peak of $0.9092 against the U.S. dollar to stand at $0.9053 .

The Swedish crown hit a two-week low around 10.3778 crowns per euro with concerns about the outlook for Latvia weighing on the currency as Swedish banks are seen having large exposure to the region.

(Additional reporting by Naomi Tajitsu; editing by Nigel Stephenson)