FOREX-Dollar drops as traders prepare for Yellen to talk up stimulus

* Dollar weakens vs most currencies

* Yellen to testify at Senate Finance Committee

* Euro creeps back above $1.21; Aussie jumps

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Tommy Wilkes

LONDON, Jan 19 (Reuters) - The dollar dropped on Tuesday as investors prepared for U.S. Treasury Secretary nominee Janet Yellen to talk up the need for major fiscal stimulus and commit to a market-determined exchange rate when she testifies later in the day.

The fall in the greenback came after a 2% rise in the dollar so far in 2021, a gain which caught off guard many investors who had betted on a further dollar decline following its weakness in 2020.

The dollar has been helped in January by rising U.S. Treasury yields and some investor caution about the strength of the global economy recovery from the coronavirus pandemic.

But most analysts are sticking with their calls for a weaker greenback from here.

"On fiscal policy, Yellen is to suggest that the US "act big" and make use of the low borrowing costs. On the dollar, it should be reiterated that the new administration is committed to the market determined exchange rate. Both are in line with our weak USD outlook," ING analysts wrote.

President-elect Joe Biden has unveiled plans for a $1.9 trillion fiscal stimulus package.

The Wall Street Journal on Monday reported Yellen, who is appearing at the Senate Finance Committee, will affirm a more traditional commitment to market-set currency rates in a Senate testimony on Tuesday.

That is in stark contrast to outgoing President Donald Trump, who often railed against dollar strength.

The dollar index, which measures the currency against a basket of rivals, dropped 0.2% to 90.587, but it was still above the more than 2-1/2 year low of 89.206 touched at the start of this month.

With the dollar weakening, the euro gained, rising 0.3% to $1.2109.

More volatile currencies such as the Australian dollar also capitalised on the weaker U.S. currency, with the Aussie up 0.4% at $0.7715.

Sterling was little changed at $1.3594.

The dollar rose against the Japanese currency and was last up 0.3% to 104.05 yen, although still consolidating in a narrow range after reaching a one-month high of 104.40 last week.

"We've seen comments from Janet Yellen that she won't be pursuing a weak dollar policy per se, but that doesn't mean that the overall impact of Fed policy won't keep the dollar weakening," said Michael McCarthy, chief strategist at CMC Markets in Sydney.

"I suspect what we've been seeing in the dollar at the moment is a minor corrective rally in an overall downtrend."

Emerging market currencies rose but were some way off recent highs.

(Additional reporting by Kevin Buckland in Tokyo Editing by Gareth Jones)