* Uncertainty on U.S. rates, Greece outlook
* Yen gains suggest markets still nervous
* Euro off 9-month low but sentiment still fragile
* Bernanke testimony later this week in focus
(Updates prices, adds comments)
By Steven C. Johnson and Luciana Lopez
NEW YORK, Feb 22 (Reuters) - The dollar edged higher
against the euro on Monday but fell against the yen as markets
worried about fiscal strains in Europe and weighed the
possibility of higher U.S. interest rates later this year.
The dollar strengthened last week after the Federal Reserve
raised the discount rate that banks are charged for emergency
loans. Investors, surprised by the timing of the move, saw a
potential end to the easy money regime that hurt the dollar
last year.
Policymakers quickly sought to dispel that notion, though,
saying the benchmark federal funds rate, which is the Fed's
main monetary policy tool, will remain low for some time.
Fed Chairman Ben Bernanke is expected to issue similar
reassurances in testimony to Congress later this week.
"The Fed officials' jobs are going to be to talk to the
market about how the discount rate should not be seen as a
policy tightening," said Meg Browne, senior currency strategist
at Brown Brothers Harriman in New York. "Right now, the
market's mentality is still to sell the euro and sterling on
dips, but I think there is a risk still of a correction
higher."
Worries about heavily indebted euro zone countries, such as
Greece, have recently weighed on the single currency.
While the euro recovered from last week's nine-month low
beneath $1.35, it was still down slightly on the day as
investors worried about Greece's ability to get its budget
deficit under control.
The euro was changing hands at $1.3588 <EUR=>, down 0.2
percent though above last week's nine-month low of $1.3442,
according to Reuters data. It was down 0.8 percent at 123.80
yen <EURJPY=> while the dollar was off 0.6 percent at 91.08 yen
<JPY=>.
Greece's budget situation "is one of those ongoing sagas
that have yet to find any resolution," said Kathy Lien,
director of currency research for GFT in New York.
Weekend reports that Germany had prepared plans for euro
zone countries to provide aid to Athens provided only a brief
boost. A German finance ministry spokesman said on Monday that
the country has made no decisions on a lifeline for Greece. For
details see [] and []
"Serious headwinds with regard to Greece" mean the path of
least resistance for the euro is still downward, said Brian
Dolan, chief currency strategist at Forex.com in Bedminster,
New Jersey, though a break above $1.3650 might change that.
The euro has lost more than 10 percent against the dollar
since December.
"This is just a pause in the overall euro downtrend. The
moves we have seen are flow-driven and I would expect more
dollar strength to come," said Westpac currency analyst Lauren
Rosborough.
Data from Europe last week showed currency speculators
raised net euro short positions to a record high.
<-------------------------------------------------
For a graphic on euro positioning, click
http://graphics.thomsonreuters.com/0210/EZ_ERCFTC0210.gif
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In other trading, sterling trade was choppy, dipping into
negative territory before gaining 0.03 percent to $1.5476
<GBP=>
Yen gains showed the recovery in risk appetite was a
tentative one. High-yielding currencies such as the Australian
and New Zealand dollars, which tend to do well when markets are
optimistic about growth, both fell against the low-yielding
yen.
Analysts said the market will focus on Bernanke's testimony
on Wednesday and Thursday for clues about the future direction
of monetary policy.
BNY Mellon strategist Michael Woolfolk said last week's
discount rate increase "was not a signal of an imminent hike in
the fed funds target rate, but it's clearly a signal that they
wish to spend the next six months preparing for one."
(Additional reporting by Naomi Tajitsu in London; Editing by
Dan Grebler)
