* Dollar edges up vs yen, euro
* Aussie drops after tame inflation data
* Dollar seen supported by short-covering
* WSJ: Fed eyes gradual bond buying 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 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 several hundred billion dollars over several months.
What the report called a "measured approach" compares with investors' base-case scenario for an initial commitment to buy at least $500 billion in Treasury debt.
In a 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 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 0.3 percent to $1.3820, having slipped as low as $1.3802 earlier.
An option barrier for the euro lies 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 may be cautious about chasing the euro lower, however, given that it rebounded sharply last week after hitting that trough near $1.3700, the trader said.
One major support may be at around $1.3787, a 76.4 percent retracement of its latest rebound from the low around $1.37 to Monday's high.
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 dollar has risen above its five-day moving average for the first time in about a month, giving dollar bulls some hopes for a further rebound.
But it is seen likely to meet formidable resistance at around 82 yen in view of selling interest by Japanese exporters.
"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, a 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 Fed 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.
"As you can tell from the rise in U.S. bond yields, basically the markets have fully priced in the chance that the Fed will start quantitative easing. We'll probably have to wait for the details for the next direction of the market," said a trader at a Japanese brokerage house.
The Australian dollar slid 1.2 percent to $0.9743, coming under pressure after data showing 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.
Immediate support is seen around $0.9660, its low last week.
Market players have been bracing for a possible short-covering bounce in the dollar against other currencies, given a recent buildup 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 Michael Watson) (Additional reporting by Charlotte Cooper and Hideyuki Sano in Tokyo and Wayne Cole in Sydney)