* Dollar remains on back foot after aggressive sell-off
* Cross/yen firm, helped by dollar's broad drop
* Australian dollar gains, rate expectations quicken
* Market looking ahead to Japan's Sunday elections
By Charlotte Cooper
TOKYO, Aug 28 (Reuters) - The dollar remained on the defensive on Friday after being sold off aggressively the day before, while higher yielding and commodity-related currencies edged up against the yen.
The U.S. dollar was hurt by heavy selling late in New York on Thursday, dropping 0.8 percent on a basket of currencies in just one hour. The greenback was hard hit on the Swiss franc amid talk hedge funds had unwound long dollar positions.
It inched up against the yen in Asia, however, which traders said was helped by buying from Japanese and European banks, after hitting its lowest in a month the previous day.
The market was also readying for Japan's general election on Sunday, and traders said the market was broadly factoring in a win for the main opposition Democratic Party.
"If anything there's been a bit of squaring up (before the vote)," one trader at a European bank in Hong Kong said.
"It feels like there may have been some short euro/yen and short dollar/yen positions out there that got squared up this morning."
The dollar rose 0.2 percent to 93.69 yen after falling as far as 93.20 on Thursday, a loss of 0.8 percent on the day.
Traders said the drop on Thursday seemed to be a result of system trading sell orders and appeared to have started with stop loss sell orders triggered in dollar/Swiss near 1.0660 francs.
The dollar stood at 1.0580 francs, little changed from late New York levels after spinning down to an eight-month low of 1.0529 in the sell-off.
The euro inched up 0.2 percent to $1.4364, below the previous day's three-week high at $1.4407 on trading platform EBS.
The Australian dollar initially rose to $0.8414 early, after a 1.5 percent jump on Thursday, with speculation growing that the Reserve Bank of Australia could raise its cash rate as early as October. A trader at a European bank in Tokyo said investors had also closed short Aussie positions, supporting it. But it pared its gains to stand steady on the day at $0.8390.
"The data from Australia has been pretty strong, suggesting the economy has a fair bit of momentum," said John Kyriakopoulos, currency strategist at National Australia Bank. "Interest rate markets are now bringing forward the prospects of a rate hike to as early as October and that is helping the Aussie."
Data out of Australia on Thursday showed a surprising jump in business investment last quarter, highlighting upward risks to growth.
The Reserve Bank of Australia meets early next week to decide on rates, and while markets expect it to keep rates unchanged at a record low of 3 percent, investors are moving to factor in a good chance of a rate move as early as October.
The Aussie rose 0.3 percent to 78.62 yen along with the euro and New Zealand dollars, which a trader for a major Japanese trading house said was more a consequence of their gains against the dollar rather than a move higher for themselves.
The New Zealand dollar pared early gains up to $0.6888, just short of a recent 11-month high at $0.6898, to stand unchanged on the day at $0.6870, with talk of stop loss buy orders above $0.6900.
Commodity-related and higher yielding currencies have been at the mercy of moves in share markets recently and have reacted particularly to moves in volatile Shanghai shares.
On Friday, however, Shanghai's index fell 3 percent but the risk currencies were so far only paring their gains on the dollar and yen rather than dropping like they have in the past.
"The 'Shanghai up or down 2 percent' trade is wearing a bit thin," the trader in Hong Kong said. (Additional reporting by Masayuki Kitano and Kaori Kaneko in Tokyo, and Anirban Nag in Sydney; Editing by Joseph Radford)