* Dollar weakens after last week’s rally
* Euro pauses below $1.23
* Stock market bounce seen supporting high-yielding FX
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Tommy Wilkes
LONDON, Feb 12 (Reuters) - The euro edged higher on Monday and the dollar fell back, as a bounce in equity markets ended a strong run for the greenback in which nervous investors had rushed to reverse their bets against the U.S. currency.
Some appetite for risk-taking crept back into currency markets after last week’s slump, helping higher-yielding emerging market currencies as well as commodity-linked currencies like the Australian and Canadian dollars, although the gains were limited.
The dollar was down 0.2 percent against a basket of currencies, erasing some of the gains last week when the dollar enjoyed its best weekly performance since 2016.
Asian share markets found a semblance of calm on Monday as S&P futures extended their bounce, while European indexes opened higher as volatility eased back following last week’s spike.
The sell-off last week spilled over into currencies, forcing many traders to unwind their bets on a stronger euro and to exit higher yielding but riskier currencies and seek safety in the Japanese yen and Swiss franc.
The moves in foreign exchange markets were far more muted than in other asset classes, however.
“We have a little bit of risk appetite back into the market,” said Nordea Markets currency strategist Niels Christensen, adding that the U.S. consumer price inflation numbers due on Wednesday would be the decisive data for direction this week.
“The market is still extremely long positioned on the euro. These investors will be quick to reduce their positions,” he said.
The euro was up 0.2 percent at $1.2275 after earlier hitting a day’s high of $1.2298. The euro suffered its worst week since November 2016 last week.
Against the yen, the dollar also eased but it paused above a five-month low.
The dollar fell 0.1 percent to 108.69 yen, remaining above Friday’s trough of 108.05 yen, its lowest level since Sept. 11. The dollar last week fell nearly 1.3 percent against the yen.
The yen tends to attract demand in times of market stress as the currency is backed by Japan’s current account surplus, which offers it more resilience than currencies of deficit-running countries.
Reports late last week that the Japanese government had decided to nominate Haruhiko Kuroda for a rare second term as Bank of Japan governor when his current one expires in April, signalling the BOJ’s ultra-loose monetary policy will remain in place, were seen as a factor that could potentially weigh on the yen and temper its gains.
Prime Minister Shinzo Abe’s government is to present Kuroda’s nomination to parliament later this month, a person briefed on the matter said on Saturday.
Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said on Monday: “It’s not as if the dollar is going to rise sharply against the yen in the next couple of days just because Kuroda is set to be re-appointed”.
“But once the market settles down, focus will probably return to differences in monetary policy... and that could give the dollar an upward bias against the yen,” he said.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Masayuki Kitano in TOKYO; Editing by Toby Chopra)