FOREX-Dollar up on US bank plan; investors see US recovery

* Dollar gains as US bank plan lifts sentiment

* Sterling/dollar hits 6-wk high on UK inflation surprise

* Euro pressured as policymakers hint at euro rate cuts (Adds comment, updates prices)

By Nick Olivari

NEW YORK, March 24 (Reuters) - The dollar rose against the yen and the euro on Tuesday as investors concluded a U.S. plan to remove bad loans from banks' balance sheets would do a lot to help the U.S. economy recover sooner than elsewhere.

The plan detailed on Monday by U.S. Treasury Secretary Timothy Geithner caused the dollar to halt last week's slide after the Federal Reserve announced a massive expansion of its balance sheet that would include buying government debt. [ID:nN23275422]

Sterling posted strong gains, however, hitting a six-week high against the dollar after British data showed an unexpected rise in consumer price inflation.

The euro was also under pressure as euro zone policymakers suggested that interest rates in the region could fall further, just as data showed manufacturing and services sector activity continued to contract significantly.

"The dollar is bid today but it's caught between two poles," said Dustin Reid, senior currency analyst, RBS Global Banking & Markets in Chicago.

"One that says quantitative easing will cause eventual erosion and one that has people buying dollars now that Geithner's plan has helped regain some market confidence. You're going to have a lot of choppy trading as things swing between those two schools of thought."

In New York trade, the dollar was up 1 percent on the day at 97.93 yen though off the day's high of 98.56 yen, according to Reuters data. The euro rose 0.3 percent to 132.59 yen , having earlier struck 134.50 yen on trading platform EBS, its highest level since October.

The yen remained under pressure as ongoing worries that the currency is overvalued combined with concerns about Japan's weak economy continue to erode the unit's safe haven status.

The euro fell 0.7 percent against the dollar to $1.3536 , down from the two and a half month peak of $1.3739 touched last week on EBS. The euro was almost midway between the session peak of 1.3678 and low of 1.3476, based on EBS data.

Testimony from Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner had muted impact on trading.

Bernanke in prepared testimony to the House of Representatives Committee on Financial Services said on Tuesday the September rescue of American International Group (AIG.N) was warranted to avoid a potential 1930s style meltdown, but showed new rules were essential.