* Euro back in favour after selloff early in the week
* Commodity currencies also firmer as sentiment recovers
* Demand of higher yields persists, yen reverses course
* Japan trade surplus below expectations; weighs on yen
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, April 20 (Reuters) - The euro and commodity currencies such as the Australian dollar rebounded on Wednesday, as investors bought them again after a mild shake-out of stretched long positions at the start of the week.
Gains in U.S. and European shares on upbeat corporate results helped soothe market sentiment after nerves were rattled on Monday by S&P's warning on U.S. credit ratings and on fears that Greece will have to restructure its debt.
While those problems remain unresolved, the moves showed investors continue to favour higher-yielding currencies at the expense of the dollar and yen, and a rise in Asian equities underscored a rebound in risk-taking sentiment.
"The fact that there was little emotional reaction after the S&P move perhaps helped to improve investors' sentiment towards risk," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.
The yen got no help from data showing that Japan logged a smaller-than-expected trade surplus in March and that exports fell more than expected year-on-year, in a sign of the disruptions caused by a massive earthquake and tsunami that struck Japan's northeast on March 11. [ID:nL3E7FJ0B1]
"There is little doubt that this is a factor for the yen to weaken," said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.
The data showed that car exports fell, likely due to disruptions to manufacturing supply chains, while imports of oil-related products rose on the back of high commodity prices, he said, adding that this trend may continue in April and May.
"Two factors that had supported yen strength until now are shrinking U.S.-Japan interest rate differentials and exporter flows. Today's data shows that one of those is weakening," Karakama added.
The dollar rose 0.4 percent from late U.S. trade on Tuesday to 82.91 yen . Dollar-buying by Japanese importers helped lend the dollar support against the yen, traders said.
The euro climbed 0.8 percent to 119.27 yen , pulling away from a two-week trough of 116.49 yen hit on EBS earlier this week.
The euro rose 0.4 percent versus the dollar to $1.4387 , having clawed above short-term resistance around the $1.4365/80 area. Both the euro's 100-hour moving average and the 61.8 percent retracement of its recent $1.4521 to $1.4156 slide both lie near that region.
On hourly charts, one possible upside target for the euro lies at its 200-hour moving average that now lies near $1.4409.
BETTER RE-ENTRY LEVELS
Samarjit Shankar, analyst at BNY Mellon, said the bank's flow indicators showed the euro was the strongest net bought currency among the G10 as its decline earlier this week gave the market better re-entry levels.
Data highlighting business activity in Germany and France continued to outpace the rest of the common currency bloc kept alive rate hike expectations by the European Central Bank.
"This has also buoyed the single currency despite the lingering sovereign debt crisis in the region's peripheral markets," Shankar added.
The dollar dipped 0.1 percent against a basket of currencies to 74.918 , falling back in the direction of a 16-month trough of 74.617 set last week.
As the dollar's value falls, the price of gold hit a record high above $1,500 and silver rose to a 31-year high.
With the U.S. Federal Reserve and Bank of Japan keeping monetary policy ultra-loose, both the yen and dollar remain the funding currencies of choice in carry trades.
Market players say macro hedge funds have been using options recently to take medium-term bets against the yen, both in dollar/yen and in the South Korean won versus the yen .
In a sign that market players see limited potential for a further fall in the dollar, dollar/yen put options were sold while there were limited offers in dollar/yen calls on Wednesday, said an options trader at a European bank.
One focal point for the yen is whether Japanese investors will step up their investment in overseas assets in the new fiscal year that started this month, and there are signs that some are heading in that direction.
Japan's third-largest private life insurer, Meiji Yasuda Life, said on Tuesday it plans to increase its investment in foreign bonds, focusing on dollar debt, with its confidence in U.S. Treasuries unshaken by the threat of a credit downgrade.
The chase for yields continues to benefit the Australian dollar, which hit a fresh 29-year high of $1.0599 . (Additional reporting by Eric Burroughs and Hideyuki Sano in Tokyo, Reuters FX analyst Krishna Kumar in Sydney)