* Yen selling eases a bit, but more downside seen
* Euro eyes Italian & Spanish govt bond auctions
* Sterling hit by woeful UK manufacturing data
By Ian Chua
SYDNEY, March 13 (Reuters) - The yen's selloff paused on Wednesday but expectations of radical policy easing from the Bank of Japan meant further weakness was more than likely, while dour UK manufacturing data consigned sterling to the dog house.
The dollar traded at 95.95 yen, having scaled a 3-1/2 peak of 96.71 when profit taking emerged. The euro eased to 125.11 yen, but remained within easy reach of a one-month high of 126.03 set on Tuesday.
Minutes of the BOJ's February meeting showed policymakers were more open to adopting unorthodox policy options of the incoming governor than previously thought, suggesting the BOJ can push through aggressive stimulus easily.
"JPY should continue to remain under pressure on growing expectations of aggressive and potentially earlier easing coming through from the BOJ," said Kiran Kowshik, strategist at BNP Paribas.
While investors took a bit of profit in the embattled yen, they turned up the heat on sterling, which slumped to a fresh 33-month low of $1.4832. Against the Australian dollar, the pound skidded towards A$1.4370, lows not seen since 1985.
Sterling's decline came after data showed British manufacturing output fell in January at the fastest pace since June, reinforcing fears the economy has tipped into its third recession since the 2008 financial crisis.
"Chancellor of the Exchequer George Osborne will present his budget next week and reports have emerged that the BOE's remit could be changed to allow additional QE despite high-running inflation," said Christopher Vecchio, analyst at DailyFX.
"Should this occur, the next leg lower in Gilt yields could be around the corner, which could put further downside pressure on sterling. We still find that GBP/USD should fall to $1.4200 by early-Q3."
Meanwhile, the euro stood at $1.3030, well within the $1.2955/3135 range seen so far this month. Traders said the market was waiting for the outcomes of government bond sales in Italy and Spain due this week for fresh cues.
Italy will offer three-year and 15-year bonds at an auction later on Wednesday, while Spain plans to sell bonds due 2029, 2040 and 2041 at a special, off-calendar auction on Thursday.
Traders said any signs of funding stress in the euro zone's third and fourth largest economies will no doubt weigh on the common currency.
Among the standout performers overnight was the Australian dollar, which firmed across the board. The Aussie dollar hit a 2-1/2 week high of $1.0336, pulling well away from the $1.0116 trough plumbed a week ago. Initial resistance is seen around $1.0350/70, a level that capped the currency in February.
It also held its ground against the yen at 99.01, having risen as high as 99.55, a level not seen since August 2008.
With Australia's relatively high yield and the Reserve Bank of Australia in no hurry to cut interest rates soon, the Aussie appeared to be back in favour for now.
Asia faces a dearth of major economic news on Wednesday. In Europe, consumer inflation data in France and Spain and industrial production in the euro zone are due.