* Dollar edges higher vs euro; Greek debt weighs
* Euro off 9-month lows but sentiment still fragile (Recasts, adds comment, updates prices)
By Luciana Lopez and Vivianne Rodrigues
NEW YORK, Feb 22 (Reuters) - The dollar edged higher against the euro on Monday but fell against the yen as investors proved cautious on continuing worries over fiscal strains in Europe and upcoming testimony from the head of the U.S. Federal Reserve.
The dollar's gains extended last week's advances 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.
Policy makers, however, dispelled that notion, saying the Fed's benchmark rate will remain low for some time. 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."
While the single currency recovered from last week's nine-month low beneath $1.35, investors still worried about Greece's ability to get its budget deficit under control.
Concerns about heavily indebted euro zone countries have recently weakened the euro, and fund managers said further losses are likely.
"I think it is safe to say that the euro is now in a secular long-term downtrend, with a fair valuation of $1.22," said Thomas Kressin, lead portfolio manager of Pimco's Global Investor Series FX Strategy Fund in Munich, Germany. [ID:nN2295534]
In late afternoon trading in New York, the euro was down 0.15 percent at $1.3595 <EUR=>. It hit a nine-month low of $1.3442 last week, according to Reuters data. Against the yen, the euro was down 0.6 percent at 123.90 yen <EURJPY=> while the dollar declined 0.5 percent to 91.13 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 [ID:nLDE61J05O] and [ID:nLDE61L1HB]
"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 5 percent against the dollar since the beginning of the year.
Data from Europe last week showed currency speculators raised net euro short positions to a record high. <-------------------------------------------------
For a graphic on euro positioning, click here ------------------------------------------------->
Analysts said the market now will focus on Bernanke's testimony on Wednesday and Thursday for clues about the future direction of monetary policy.
Other economic highlights ahead this week include readings on U.S. new home sales on Wednesday, durable goods on Thursday and preliminary figures for fourth-quarter gross domestic product on Friday. (Additional reporting by Gertrude Chavez and Steven C. Johnson in New York)