The dollar was broadly weaker on Tuesday, falling to a one-month low against the euro in thin trading, as investors continued to scale back bullish bets on the greenback on the view that the Federal Reserve could reduce its asset-buying program later than expected.
Fed Chairman Ben Bernanke told lawmakers last week the U.S. central bank still expects to start scaling back its massive bond purchase program later this year, but he left open the option of changing that plan if the economic outlook shifted. He added that nothing was set in stone.
"In the absence of any economic news, positioning has been driving the FX market," said Brian Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut.
Investors had accumulated dollars the last few months as Bernanke suggested in May that the Fed could start winding down its stimulus plan later this year. A reduction in the Fed's bond purchases would be positive for the greenback because it means that the U.S. central bank won't be flooding the market with dollars as much.
"The market is still quite long dollars and in quiet periods like today, traders are scaling back their positions especially in the wake of what Bernanke said last week."
The euro rose to $1.3238, its highest level since June 21, as some investors pushed it to the 50 percent Fibonacci retracement of the move from the early April low to the mid-June high. It was last at $1.3225, up 0.3 percent on the day, rising for a third straight day.
(Read more: Treasury yields fall as Bernanke curbs bond-buying worries)
Investors are looking to flash Purchasing Managers' Index data on Wednesday as worries about euro zone economies are re-emerging. Analysts said there would probably be selling into any rebounds in the euro.
Trading "is more of a technical move in an otherwise very thin market amid generally soft data and questions on the timing of tapering," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Bernanke's dovish remarks have emphasized that the U.S. central bank's bond buying will continue in some form and interest rates are likely to remain low for the foreseeable future.
Benchmark yields have fallen as other top Fed officials have stressed that the timing of any reduction in the central bank's $85 billion monthly asset purchases would depend on economic data.
As a result, along with some weaker-than-expected U.S. data, the dollar has sold off to key support levels. Further downside will require another round of bad data, analysts said.
"The market is getting comfortable with the idea that tapering is not tightening," said Sean Cotton, vice president and foreign exchange advisor at Bank of the West in San Ramon, California.
(Read more: Will it be third time's a charm for dollar-yen?)
The dollar index was last down 0.3 percent at 81.983. It fell to 81.926, also its weakest since June 21.
Analysts, however, said the dollar would likely strengthen in the coming months against currencies such as the euro, sterling and the yen because the Fed is expected to be the first major central bank to make its policy less accommodative.
But few anticipate the dollar's rise to be smooth.
Benchmark U.S. 10-year Treasury yields, which have had a robust correlation with the dollar index, have slipped in recent weeks. They last stood at 2.507 percent, slightly up on the day but well below the 2.755 percent hit on July 8, their highest since August 2011.
The dollar was down 0.2 percent against the yen at 99.43 yen, recovering from a one-week low of 99.13 yen earlier.
Analysts said Japanese Prime Minister Shinzo Abe's decisive upper house election win last weekend would pave the way for pro-growth fiscal policies and for further Bank of Japan monetary easing, which would weaken the yen.
The dollar is up more than 15 percent versus the yen this year, and the recent slide in dollar/yen has likely bottomed out, according to trends in the options market.
Analysts said the onset of holidays has reduced volumes and volatility, which could result in most currencies trading in ranges.
Some $3.92 billion in euros had changed hands, according to Reuters Dealing data on Tuesday, and $2.06 billion in yen.