FOREX-Yen squeezed against dollar ahead of Yellen testimony

* Dollar up 0.6 percent vs yen, marginally higher vs euro

* Drop in inflation expectations hits kiwi dollar

* Market awaits European response to Greek reform plan (Recasts with dollar gains vs yen, more comment)

By Patrick Graham

LONDON, Feb 24 (Reuters) - The dollar rose to a two-week high against the yen on Tuesday ahead of testimony by Federal Reserve chief Janet Yellen, which should show whether the U.S. central bank is on track to raise interest rates later this year.

A more subdued performance against the euro, where investors were awaiting the reaction of Germany and other euro zone leaders to reform proposals from Greece, kept a lid on gains for the dollar against a basket of currencies.

But dealers said that speculation Yellen would at least not derail expectations of a rise in U.S. interest rates in the second half of this year had put pressure on the yen in the top half of a 116-121 yen range it has held since November.

"We're still waiting on more details around Greece this afternoon and then the focus will be on Yellen," said a currency strategist with one European bank in London.

"If she sends a message that is less dovish than the last Fed minutes then we should see the dollar gain further. It is all about the squeeze on the yen this morning."

The dollar gained 0.6 percent to 119.51 yen. Against the euro, it was less than 0.1 percent stronger at $1.1325.

The day's biggest mover on major currency markets was the New Zealand dollar, driven more than one percent lower against its U.S. counterpart after a drop in domestic inflation expectations.

Months of dollar strength based on expectations that the Fed will raise interest rates in the middle of this year, allied to falling oil and metals prices, have hammered currencies in commodity producing Australia, New Zealand and Canada.

The central bank inflation survey added to concerns that New (KOSDAQ: 160550.KQ - news) Zealand's economy will struggle to build on a hitherto healthy performance in the face of lower global demand.

"It's the same picture we have seen on the kiwi and the Aussie over the past month," said a dealer with one international bank in London. "There is no chance of them raising interest rates again this year, and we may yet see a turnaround towards cutting them."

By 0834 GMT, the kiwi was down 1 percent on the day to $0.7450. The Australian dollar lost 0.6 percent against the U.S. dollar, and Canada's 0.45 percent.

Yellen's appearance before the U.S. Senate Banking Committee (1500 GMT) comes after the minutes from the January meeting dented expectations of an early rate rise.

Analysts are divided on what note she will sound, although few think she is ready to take the sort of clear step toward a first hike that would spur another round of dollar gains.

"We expect the Fed to cement expectations for a hike in the third quarter and I don't think Yellen will want to push markets to veer significantly off course today," said Stephen Gallo, European Head of FX strategy at Bank of Montreal (Toronto: BMO.TO - news) in London.

"That leaves us with a continuation of the picture where you would be looking to buy the dollar on the dips." (Editing by Robin Pomeroy)