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Dollar bulls pull in horns ahead of Bernanke speech

Sha Ying | CNBC

The dollar stayed on the defensive on Wednesday as investors got cold feet ahead of Federal Reserve Chairman Ben Bernanke's testimony to Congress later in the day.

Investors are wary of being long on the dollar after Bernanke last week caused a shakeout of positions with comments that were considered unexpectedly dovish.

(Read More: Record number of asset managers bank on strong dollar)

"He probably does not want to knock down share prices. So he may want to avoid being too hawkish," said Koichi Takamatsu, a manager of forex at Nomura Securities.

The dollar index, which tracks the greenback's performance against a basket of major currencies, was not far from a three-week trough, having slid around 0.6 percent overnight.

It last stood at 82.639, 0.1 percent above late U.S. levels but still not far from Tuesday's three-week low of 82.395.

(Read More: Warning: A 15% drop in the US dollar may be coming)

That saw the euro pop back to $1.3140, down 0.15 percent on the day but still within sight of last week's peak of $1.3208.

Against the yen, the greenback fetched 99.35 yen, up 0.3 percent in Asian trade due largely to bids from Japanese importers, though it still kept some distance from this month's high of 101.53.

Bernanke is expected to underscore that an expected tapering of asset purchases does not equate to a tightening of monetary policy and to hammer home the message that overnight interest rates will be kept near zero for the foreseeable future.

That would still leave in place plans to start tapering before the end of the year, assuming the U.S. economy improves as the Fed expects.

(Read More: Will Bernanke taper talk rock the markets again?)

The president of the Kansas City Federal Reserve Bank, Ester George, again argued that the central bank should start cutting its massive asset-buying program in September.

Traders said the preemptive move to cut long dollar positions meant there could actually be room for a bounce if Bernanke did not sound too dovish.

"We continue to favor running long dollar positions versus G10 currencies, whose central banks are in easing mode, particularly sterling right now," analysts at BNP Paribas wrote in a note.

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Bernanke's testimony before the House Financial Services Committee will start at 1400 GMT, with the text of his prepared remarks to be released at 1230 GMT.

Ahead of the big event in Washington, the Bank of England will release the minutes of its latest MPC meeting, which could shed more light on how dovish its new governor Mark Carney is.

Sterling was soft, staying near four-month lows against the euro, after benign UK inflation data the previous day. The euro traded at 86.935 pence, just below its four-month high of 87.075 set on Tuesday.

(Read More: Hawkish minutes won't change Aussie downtrend)

On the other hand, the Australian dollar held onto much of its 1.5 percent gain from the previous day after investors were forced to cut bearish positions after minutes of the Reserve Bank of Australia (RBA) led the market to lengthen the odds of a rate cut next month.

The Aussie last traded at $0.9223, well off a three-year trough of $0.8998 plumbed on Friday. Immediate resistance is seen around $0.9255/65, an area containing the overnight high and the 38.2 percent retracement of its June-July fall.

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