* Japanese econ minister hopes FX market can find "balance"
* BOJ meeting, Bernanke's Congressional testimony in focus
* Dollar index stays near three-year high
By Anirban Nag
LONDON, May 21 The dollar rose against the yen on Tuesday after a Japanese minister clarified remarks about the yen's drop, but many awaited the Federal Reserve chief's testimony before adding to bets on a stronger U.S. currency.
Speculation the Fed will trim its bond purchases sooner than expected has mounted given signs of an improvement in the U.S. labour market. Chairman Ben Bernanke testifies to Congress on Wednesday and his words will be combed for clues on the timing.
If Bernanke reiterates his ultra-loose monetary policy stance, the dollar could give up some of its gains against most major currencies. However, any hint asset purchases could be wound down later this year would give the dollar index, which has risen 5 percent this year, a huge boost, traders said.
The index, which measures the dollar against a basket of six currencies, was up 0.12 percent at 83.839, not far from Friday's peak of 84.371, its highest since July 2010.
The dollar was up 0.3 percent at 102.65 yen after Japanese Economics Minister Akira Amari said he hoped the yen settles at a level justified by fundamentals and where the impact on imports and exports is balanced.
On Monday, the yen rose after Amari suggested at the weekend that its strength had been largely corrected. It has shed 15.5 percent in 2013, hitting a 4 1/2-year low of 103.32 on Friday.
"In the larger scheme of things what matters now is what Bernanke has to say. That will determine the outlook for the dollar," said Peter Kinsella, currency strategy at Commerzbank.
"We expect the Fed to err on the side of caution and the subdued inflation numbers we saw recently will give them more time to keep policy easy."
Any dip in the dollar would be temporary as the U.S. economy is still growing while the euro zone is in recession and the Bank of Japan is committed to flooding the market with liquidity to achieve 2 percent inflation.
The BOJ, which began a two-day meeting on Tuesday, is expected to keep policy unchanged but could tinker with its bond-buying plan to curb a recent rise in Japanese yields. Analysts said the yen looked set to resume its recent weakening.
"I think it's going to be volatile for a while ... but eventually it will be hard to ignore the amount the BOJ is buying and (Japanese government bond yields) will drop," said Junya Tanase, executive director of forex at JPMorgan.
The euro was flat at $1.2890, with gains likely to be checked around $1.2910 by expectations the European Central Bank will lower its deposit rate to below zero.