* Dollar edges up vs yen, euro
* Aussie drops after tame inflation data
* Dollar seen supported by short-covering
* WSJ: Fed eyes gradual bond buys of several hundred bln dlrs
By Masayuki Kitano
TOKYO, Oct 27 (Reuters) - The dollar edged higher against the yen and euro on Wednesday after the Wall Street Journal said the U.S. Federal Reserve was likely to unveil plans for gradual Treasury purchases at its policy meeting next week.
The newspaper said the Fed is likely to reveal a programme of U.S. Treasury bond purchases worth a few hundred billion dollars over several months.
What the Journal report called a "measured approach" compares with investors' base-case scenario of an initial commitment to buy at least $500 billion in Treasury debt.
In a recent Reuters survey earlier this month, U.S. primary dealers' projections for the size of the Fed's expected quantitative easing had ranged from $500 billion to $1.5 trillion.
"The market has had in mind a figure of $1 trillion or more and we had been in a situation where that had led to dollar weakness," said Masafumi Yamamoto, chief FX strategist Japan for Barclays Capital.
"Compared to that, the initial size may seem small," he said, adding that the report could prompt some market players to cover their short dollar positions.
The Wall Street Journal said the Fed could leave open the possibility of more purchases in the future. Or it could halt the programme if the economy or inflation took off surprisingly, the newspaper said.
The euro dipped 0.2 percent to $1.3834, having slipped to as low as $1.3815 earlier.
The euro has an option barrier at $1.3800, a break of which could open way for a test of its recent low near $1.3700, said a trader for a Japanese brokerage house.
Traders, however, may be cautious about chasing the euro lower after it rebounded sharply last week after hitting that trough near $1.3700, the trader said.
The dollar rose 0.2 percent to 81.63 yen, pulling further away from a 15-year low of 80.41 yen struck on trading platform EBS earlier this week.
"The consensus has been for roughly $500 billion after the November FOMC meeting so the fact that the Wall Street Journal story seems to say a few hundred billion, it seems to be a little less than what would be considered consensus," said Sue Trinh, senior FX strategist at RBC Hong Kong.
"There's been a bit of a scramble to cover dollar shorts as the market has reassessed what it might mean relative to consensus," Trinh said.
Growing expectations the Federal Reserve may proceed more cautiously than previously thought, if it launches a new round of monetary easing at next week's policy meeting, had given the dollar a boost on Tuesday.
Partly reflecting that caution, U.S. Treasury yields climbed, with the benchmark 10-year yield rising to one-month highs above 2.6 percent on Tuesday. Traders said that rise in Treasury yields was helping to lend the greenback support.
The Australian dollar slid 1 percent to $0.9760, coming under pressure after data showed Australian consumer prices climbed by less than expected last quarter while the annual pace of core inflation was the slowest in five years, greatly lessening the urgency for a hike in interest rates next week.
Market players have been bracing for a possible short-covering bounce in the dollar against other currencies, given a recent build-up in bets that the dollar would fall.
Latest U.S. Commodity Futures Trading Commission data shows currency speculators still have hefty short positions in the dollar, even after having trimmed such bets recently.
The value of the dollar's net short position fell to $25.8 billion in the week ended Oct. 19. Net short dollar positions totalled about $30 billion two weeks ago, the biggest bet against the greenback since at least June 2008. (Editing by Joseph Radford) (Additional reporting by Charlotte Cooper and Hideyuki Sano in Tokyo and Wayne Cole in Sydney)