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Dollar Dips vs Euro on Remarks From Fed's Bullard

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The U.S. dollar fell against the euro on Tuesday after St. Louis Federal Reserve President James Bullard dented expectations the U.S. central bank may taper its bond purchases anytime soon.

But the dollar rose against the yen, a day before the Bank of Japan concludes a two-day policy meeting. Traders widely expect the yen to fall further on expectations Japan will continue its aggressive monetary easing.

Bullard, at an event in Frankfurt, said the Fed should continue quantitative easing, adjusting the pace of bond buying according to incoming data. He also said U.S. inflation has recently been below target.

"The fact that he supports continued easing is seen as a negative for the dollar because Bullard is one of the more hawkish members" of the Fed's voting committee, said Eric Viloria, senior currency strategist at Forex.com.

(Read More: Follow US, St. Louis Fed Chief Bullard Tells ECB)

Comments from Fed officials were closely watched ahead of Chairman Ben Bernanke's testimony to Congress on Wednesday. The dollar has gained 5 percent so far this year on speculation the Fed may start winding down its stimulus sooner than expected, and investors will look to see if Bernanke drops any hint on that.

Chicago Fed President Charles Evans said on Monday the Fed could keep up its current level of bond-buying stimulus, but may end it abruptly in the autumn if by then it was sure that the labor market was on a solid footing.

The euro rose 0.2 percent to $1.2907, having reached a session peak of $1.2920 and moving away from a six-week low of $1.2795 touched on Friday, according to Reuters data.

Bernanke testifies to Congress at 10 a.m. EDT. Analysts said if Bernanke reiterates his ultra-loose monetary policy stance, the dollar could come under pressure, but any suggestion of the Fed winding down asset purchases later this year would give a huge boost to the dollar.

"Bernanke's views will give us a good sense of whether the market's expectations for tapering QE are overblown," said Kathy Lien, managing director at BK Asset Management in New York.

Also on Wednesday, the Fed will release the minutes of its April 30-May 1 policy setting meeting.

Against the yen, the dollar was up 0.2 percent at 102.47, coming off a session peak of 102.88 yen.

(Read More: Japan's '3 Arrows' May Run Into German Wall)

The yen rallied from a 4 1/2-year low against the dollar on Monday after Japanese Economy Minister Akira Amari suggested the yen's strength had been largely corrected.

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But on Tuesday, he said he hoped the yen settled at a level justified by fundamentals and at which the impact on imports and exports was balanced.

"It appears that Mr. Amari has been reprimanded by Japanese policy leadership, not a small coincidence considering that the Bank of Japan is meeting and will announce its latest measures, if any, tomorrow," said Christopher Vecchio, currency analyst at DailyFX in New York.

The BOJ 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 with Japanese investors likely to hunt higher yields overseas.

The dollar index, which measures the dollar against a basket of major currencies, was up 0.1 percent to 83.81, not far from Friday's peak of 84.371, its highest since July 2010.

Some analysts said any near-term dollar weakness would be temporary. The U.S. economy is growing while the euro zone is in recession, and the Bank of Japan is committed to flooding the market with liquidity to boost inflation to 2 percent.

Expectations have grown the European Central Bank may lower its deposit rate to below zero, which could spark capital outflows and hit the euro.

The euro reached a four-month high against the Swiss franc on Tuesday at 1.2529 francs, according to Reuters data, and was last up 0.3 percent at 1.252 francs. The dollar was up 0.3 percent to 0.9698 franc.

The International Monetary Fund said in a report released on Tuesday that the Swiss National Bank should use any weakness in the franc to unwind the large foreign currency reserves it has built up to keep a lid on its currency.

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