* Dollar helped by higher yields; lack of trade,geopolitical news
* Euro loses steam after Draghi sounds cautious on economy
* Yen capped, sterling helped by Takeda's bid to buy Shire
By Hideyuki Sano
TOKYO, April 27 (Reuters) - The dollar held near a3-1/2-month high against a basket of currencies on Friday ashigher U.S. yields prompted an unwinding of short positions inthe currency while the euro was hampered by a dovish tone fromthe European Central Bank.
The dollar's index against six major currencies onThursday hit a high of 91.639, its strongest level sincemid-January, as investors have warmed to the greenback thanks toattractive Treasury yields. It last stood at 91.527.
In Japan, the yen was little changed after the centralbank's policy decision at which it kept settings unchanged.
The benchmark 10-year U.S. Treasuries had hitthe psychologically important three percent mark on combinationof worries about inflation and increased debt supplies as aresult of President Donald Trump's tax cuts and spending plans.
Earlier this year, the correlation between U.S. yields andthe dollar had broken down as investors focused more on tradefrictions and geopolitical issues, with currencies largelydriven by Trump's tweets than by economic data and yields.
But so far this week, the markets have turned theirattention to interest rate plays, pushing concerns overU.S.-China trade on the back burner for now.
In addition, speculators' net dollar short position incurrency futures in Chicago, a closely-watchedindicator on market positioning, had hit a 6-1/2-year high,suggesting some short-covering will be due.
"There is an element of positioning unwind underpinning therecent dollar strength... The currencies that had the largestnet long positions against the dollar are the ones that havedeclined the most," wrote analysts at ANZ wrote.
The euro, in which speculators held record long position,fell to $1.20965 in the previous session, its lowestlevel since Jan. 12. It last stood at $1.2112, and is down 1.4percent on the week.
The common currency slid on Thursday after ECB chief MarioDraghi acknowledged evidence of a "pull-back" from exceptionalgrowth readings seen around the turn of the year, although thecentral bank sought to bolster expectations for a gradualwithdrawal of its monetary stimulus.
The dollar changed hands at 109.17 yen, having risento a 2-1/2-month high of 109.49 yen earlier in the week. So farthis week, it has gained 1.4 percent.
In the BOJ's first policy meeting under the new leadership,the central bank dropped a reference to inflation reaching itstwo percent goal in about two years, however, few see policyimplications from this shift in communication.
The yen's weakness is likely to reflect expectations ofyen-selling as drugmaker Takeda Pharmaceutical ispushing to buy London-listed Shire in a $64 billiondeal, which would be the biggest Japanese acquisition of aforeign company.
That amount is about twice the size of Japan's annual tradesurplus, although it is not clear how Takeda will finance thedeal.
"Given the May 8 deadline of the deal, you would need to bereally courageous to go long on the yen until then," said YukioIshizuki, senior strategist at Daiwa Securities.
In contrast, the pound has been relatively well-supported. It last stood at $1.3930, down 0.5 percent sofar this week.
Against the yen, it was fetching 152.14 yen, up0.9 percent this week.
Elsewhere, the Australian dollar hit a 4-1/2-monthlow of $0.7539.
(Editing by Shri Navaratnam; Editing by Sam Holmes)
