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FOREX-Dollar unsettled by dovish Yellen, yen stays on defensive

* Dollar knocked off two-week highs vs currency basket

* Yen hits fresh 6-year low vs NZ dlr; 10-month low vs Aussie

* Yellen says Fed's extraordinary commitment still needed for some time

* Aussie sets 4-month high vs dlr as RBA stands pat, later sheds gains

(Updates prices, adds comments)

SYDNEY/SINGAPORE, April 1 (Reuters) - The yen stayed on the backfoot on Tuesday, while the dollar hovered near a two-week high versus a basket of currencies after the head of the Federal Reserve took pains to defend the central bank's ultra-loose monetary policy.

The dollar index was little changed at 80.120, after hitting 80.296 on Monday. Against the yen, though, the dollar rose 0.1 percent to 103.30 yen, holding near Monday's three-week high of 103.44 yen.

In a setback for dollar bulls, Fed chair Janet Yellen said on Monday that "considerable" slack still existed in the job market and that further monetary stimulus could be effective.

Her latest comments somewhat countered those she made last month, when she shocked markets by suggesting the possibility of interest rate hikes from early next year.

"Yellen's comments appeared to be more dovish than what she had said earlier...so the market does seem to be in a risk-positive mode," said Divya Devesh, FX strategist for Standard Chartered Bank in Singapore.

"So we have seen the likes of commodities currencies rallying," he said.

The euro held steady at $1.3774, having rebounded from Monday's session low of $1.3721.

Investors had initially sold the euro on Monday after data showed euro zone inflation slowed further last month, putting more pressure on the European Central Bank (ECB) to act against the threat of deflation.

YEN ON DEFENSIVE

Improving risk sentiment, partly on hopes of fresh stimulus from China, has weighed on the Japanese currency of late.

In particular, the yen has fallen sharply against higher-yielding commodity currencies. The New Zealand dollar reached a fresh 6-year high of 89.67 yen on Tuesday, after having rallied 3.6 percent in the first quarter.

The kiwi has been in demand as the Reserve Bank of New Zealand became the first central bank of a developed country to start normalising policy this year.

The Australian dollar saw some choppy intraday swings. A slight improvement in China's official Purchasing Managers' Index, initially helped underpin the Aussie, though a private survey pointed to a contraction in activity in March.

The Aussie dollar then extended its gains and jumped to a four-month high of $0.9310 after the Reserve Bank of Australia kept interest rates unchanged at 2.5 percent, as expected.

But it quickly gave back those gains after the RBA noted the currency was still high by historical standards, and last stood at $0.9266, steady on the day.

The Aussie dollar's quick pullback from the day's highs probably had a lot to do with market positioning, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

"The street was universally bullish today," Halley said, referring to market sentiment toward the Australian dollar.

"My guess is Asia intraday (players) are sitting long and wrong at the moment," he added.

Against the yen, the Australian dollar touched a 10-month high of 95.97 yen earlier on Tuesday and was last up 0.1 percent on the day at 95.70 yen.

(Editing by Kim Coghill)