The dollar fell against a basket of currencies on Tuesday as investors cut long bets ahead of testimony by Federal Reserve chief Ben Bernanke that could give more clues on when U.S. monetary stimulus will be scaled back.
Data suggested its losses against the euro would remain muted, with German investor sentiment below expectations and euro zone inflation highlighting subdued price pressures. That added to the view that the European Central Bank will keep rates low to aid an economic recovery.
"Volumes are low and unless the data is a huge surprise, which was not the case, we are not going to see huge moves. Also investors will stay cautious before Bernanke's testimony," said Alvin Tan, currency strategist at Societe Generale. "In the near term, a euro rise above $1.3200 is a sell."
The euro edged up 0.3 percent to about $1.31, recovering from $1.3057 struck after the German ZEW sentiment survey.
Some large investors including Asian central banks were lined up to sell towards $1.3120/50, traders said. The common currency's gains saw the dollar index shed 0.2 percent to 82.846. The index hit three-year high of 84.753 on July 9, the day before Federal Reserve chairman Ben Bernanke's surprisingly dovish comments on withdrawing its bond buying program caused heavy selling of the U.S. currency.
Disappointing U.S. retail sales for June has also dented expectations of an imminent reduction in stimulus by the Fed, and weighed down on the dollar.
Bernanke is due to testify on Wednesday and analysts expect him to reiterate that U.S. monetary policy will remain accommodative. He is likely to keep alive expectations the Fed will start withdrawing the stimulus later this year, while making clear it will not tighten policy. That could trigger some sharp market swings. "There is a risk that the dollar could soften a bit more," said Jane Foley, senior currency strategist at Rabobank.
The dollar eased 0.3 percent against the yen to trade above 99 yen, staying above last week's low of 98.20 yen. An immediate resistance level is seen at 101.54 yen, its July 8 peak.
The yen could face more pressure towards the weekend on expectations that Japan's upper house election on Sunday will hand Prime Minister Shinzo Abe a big victory, giving him more freedom to push forward with his agenda to revive the economy through monetary easing.
The yen could face some pressure towards the weekend on expectations that Japan's upper house election on Sunday will hand Prime Minister Shinzo Abe a big victory, giving him more freedom to push forward with his agenda to revive the economy through monetary easing. The Australian dollar bounced 1.5 percent to above $0.92 as market players trimmed bets on further interest rate cuts following comments from the central bank.
The Reserve Bank of Australia said in the minutes of its July meeting that the current policy stance was appropriate.