FOREX-Yen gets a breather after hitting 3-1/2 yr low vs dollar

* Yen recovers after hitting 3-1/2 year trough vs dollar

* Hints of early BOJ easing prompted earlier yen selling

* Near-term risk reversals flip to yen calls

LONDON, March 12 (Reuters) - The yen rose against the dollar for the first time in a week on Tuesday, bouncing from a 3-1/2 year low, as long-term investors and hedge funds took profits on large bets initiated recently against the Japanese currency.

But speculation the Bank of Japan could embark of more aggressive monetary stimulus sooner than previously thought is likely to check any sharp rebound in the yen, traders said.

The speculation was triggered by a report in the Nikkei business daily that the government's nominee for Bank of Japan governor, Haruhiko Kuroda, hinted he may launch new monetary easing steps soon after he takes office next week, rather than wait for his first policy meeting on April 3-4.

The dollar was down 0.4 percent on the day at 95.90 yen , with bids cited below 95.50 and stop-loss sell orders at 95.40. The dollar had climbed to 96.71 yen, its highest since August 2009 in Asian trade.

"Dollar/yen uptrend is still intact for the next couple of months, although the most aggressive part of the move is now behind us and we are looking for 98 yen by the end of Q2," said Ned Rumpeltin, G10 currency strategist at Standard Chartered.

"Expectations that Kuroda will deliver aggressive monetary policy easing to beat deflation are already very high. It will take something extraordinary to surprise markets."

He added exporters could repatriate their dollar earnings just before the Japanese financial year ends on March, 31 and could see dollar/yen come under some pressure in the near term.

In the options market, near-term risk reversals, which measure relative demand for put and call options, flipped towards yen calls -- or bets the yen will rise further -- from puts -- or bets it would weaken, lending the yen some support, traders said. They cited profit-taking on long dollar positions.

But any pullback in the dollar could present a fresh buying opportunity to investors looking to add positions in favour of the greenback given an improving U.S. outlook just as other developed economies, including Britain, the euro zone and Japan are either struggling with recession or deflation.

"We have this theme of a better dollar that is being recognised across the board," said Jane Foley, senior FX strategist at Rabobank.

DOLLAR INDEX

The dollar index, which measures the greenback against a basket of other currencies, rose 0.15 percent on the day to 82.704. It hit a seven-month high of 82.924 on Friday

The moves came against a backdrop of optimism on the U.S. economy, with the Dow Jones industrial average closing at a record high, while Wall Street's "fear gauge", the CBOE Volatility Index, hit its lowest since February 2007.

The stock market gains and above-forecast U.S. jobs growth revealed in data on Friday lifted yields on U.S. Treasuries, which tend to have strong positive correlation with dollar/yen as higher yields are thought to attract more bond investments.

Spreads between two-year U.S. Treasuries and their German counterparts have also risen since January-end, underpinning demand for the dollar and keeping the euro under pressure.

The single currency fell 0.3 percent to $1.3010, but held above Friday's three-month low of $1.2955. Traders reported option expiries at $1.3000 which would keep the currency tied around those levels.

Against the yen, the euro traded 0.6 percent lower on the day at 124.85 yen, and below a 34-month high of 127.71 reached last month.

The euro is seen vulnerable to more selling as the austerity-hit euro zone's economy is expected to face an uphill battle to recover from recession. Rabobank's Foley said she expected the euro to slip to $1.28 in three months time.