* Dollar takes breather after surging on China rate rise
* Aussie rebounds smartly, but euro rebound shallower
* Uncertainty about Fed policy, global currency talks looms
(Recasts, updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, Oct 20 (Reuters) - Investors resumed selling the dollar against most currencies on Wednesday, shaking off the prior session's Chinese interest rate hike and rediscovering an appetite for higher-yielding assets.
Currencies hit hardest by China's rate hike, which sparked
fear of slower Chinese and global growth, bounced back sharply
on Wednesday. The commodity-linked Australian dollar rose one
percent
The rebound in the euro and sterling was more modest, though, and analysts said large speculative bets against the dollar along with lingering uncertainty about U.S. monetary policy and global currency tensions could limit dollar losses.
Scotia Capital strategist Camilla Sutton said the market is "in a bit of a gray area" that should persist at least through a weekend gathering of the G20 and likely until the Federal Reserve's November meeting, at which officials are expected to detail plans to pump more money into a sluggish U.S. economy.
"We think the dollar will end the year weaker, but for now, we're probably going to be in a period of more subdued trading until we get a firmer idea of where policymakers are headed," she said.
The euro, which hit an 8-1/2-month high above $1.41 last
week, was at $1.3835
In the UK, minutes from the Bank of England's last monetary policy committee meeting showed a three-way split, with one member voting for more monetary easing [ID:nBOE004351]
Sterling initially touched a session low against the euro
The dollar fell 0.4 percent to 81.25 yen
Some analysts said the market's reaction to China's sudden interest rate hike on Tuesday was excessive and said certainty that the Federal Reserve will ease policy further next month was keeping the dollar under pressure.
CitiFX strategists recommended going long the euro at $1.3845 with a $1.5145 target, a level last approached in November 2009.
Several Fed officials have indicated that the U.S. central bank will offer more stimulus, with one saying $100 billion a month in bond purchases may be appropriate. [ID:nN19258951]. But other policymakers have suggested they would proceed cautiously.
Analysts say the market has already fully discounted more Fed easing, giving the dollar scope to recover.
Some analysts also said China's rate hike and assurances from Treasury Secretary Timothy Geithner the United States was not devaluing the dollar for export advantage suggest G20 finance officials may be trying to iron out differences over exchange rate policy ahead of their weekend meeting in South Korea.
Washington wants China to allow more rapid appreciation of the yuan, while Beijing and others complain that dollar weakness is stoking inflation by pushing money into their faster-growing economies.
Scotia's Sutton said even the Bank of Japan's decision not to intervene again in currency markets to stem steady yen strength may be part of an attempt to cut tensions.
"We are certainly seeing a lot of olive branches out there, and it seems it could be tied to attempts to stave off all this talk of currency wars," she said.
(Additional reporting by Anirban Nag in London; Editing by Chizu Nomiyama)