(Corrects paragraph 8 to ... 78.799 ..., not ... 79.799)
* Dollar near 6-week low on index but edges up on majors
* Cross/yen retreats after overextension
* Bernanke: as recovery takes hold, will need to tighten
By Charlotte Cooper
TOKYO, July 21 (Reuters) - The dollar inched off the steepest of the week's lows on Tuesday as the market awaited testimony by Federal Reserve chief Ben Bernanke, while the yen bounced from a drop in holiday-hit trade the day before.
Fed Chairman Bernanke, writing in the Wall Street Journal ahead of two days of congressional testimony, said the U.S. central bank would need to rein in accommodative measures to prevent inflation as recovery took hold.
But he said conditions were unlikely to warrant tighter monetary policy for an extended period of time.
Traders and analysts said Bernanke did not sound anxious about removing excess stimulus from the system.
"The article is laying out the groundwork that there's not going to be any immediate rate hikes, which is no news, and just outlining a few options the Fed has when the time is right to take liquidity out of the market," a senior trader at a European bank in Hong Kong said.
"But the key thing is the time's not right."
The euro slipped 0.1 percent on the day to $1.4214, after touching a six-week peak at $1.4250 on trading platform EBS the previous day.
The dollar also edged up from its lowest in a month against the Australian dollar and a three-week low on sterling set the previous day but it hovered not far above a six-week low of 78.799 against a basket of currencies.
Bernanke will start his twice-yearly testimony on the economic outlook and monetary policy before the House Financial Services Committee at 1400 GMT and UBS analysts wrote in a client note that he was likely to make clear there is no rush to tighten.
"Expectations of exitting too early could undermine U.S. growth prospects and the dollar, but under-delivering would keep inflation concerns elevated and would also weigh on the dollar," they wrote.
RISK CURRENCIES SLIP
The yen lost about 1 percent on the euro on Monday when Tokyo markets were closed and touched its lowest in two weeks at 134.76 yen per euro.
On Tuesday the euro fell 0.5 percent on the day to 133.46.
Currency market players have been watching stock markets and U.S. corporate earnings as a gauge of how quickly recovery may materialise and the S&P 500 hit an eight-month closing high on Monday, with shares buoyed after lender CIT Group was thrown a lifeline to avoid bankruptcy and brokers upgraded technology bellwethers.
"The market got carried away with putting on risk positions yesterday at not great levels," the senior trader said.
"Today people are selling out some of the yen crosses and that's putting a bit of pressure on dollar/yen."
The dollar, which hit its highest just over a week on Monday at 94.80 yen, slipped 0.3 percent to 93.92 yen.
Other yen pairs also fell. Sterling shed 0.7 percent to 154.86 yen and the New Zealand dollar dropped 0.8 percent to 61.35 yen.
The Australian dollar, which hit its highest in more than a month at $0.8180 on Monday, was down 0.4 percent on the day at $0.8132.
It also slipped 0.6 percent to 76.41 yen, after touching a two-week high of 77.08 yen on Monday.
The losses came before minutes from the Reserve Bank of Australia showed it grew more optimistic on the outlook for growth when it left rates steady at its meeting in July.
The RBA still saw scope for further easing, however, should an expected recovery not materialise, and investors appeared to shrug the minutes off as a repeat of its earlier statements.
The Bank of Japan has taken measures to shore up financial markets in the face of the global credit crunch and extended some steps at its most recent meeting in July.
Minutes of its mid-June meeting released on Tuesday, however, showed one board member said it should start looking at ways to end its unconventional policy steps, although the yen largely took the news in stride..
The Japanese currency also held steady after news that cabinet members had signed off on Prime Minister Taro Aso's plan to dissolve parliament's lower house for an election on Aug. 30, as polls show his ruling party in danger of a historic defeat.
Analysts said there were plenty of questions over how the opposition Democrats, leading in the polls, would fund their planned social programmes.
"But for now, the short-term message is that the market really wants change," said Noritsugu Hirakawa, a strategist at Okasan Securities. (Editing by Michael Watson)