FOREX-Dollar edges down in summer lull, tracks U.S. yields
* Dollar briefly drops to one-week low vs. yen, pares losses
* Drop in Portuguese yields helps bolster euro
* Investors await Australian inflation data on Wednesday
TOKYO/SYDNEY, July 23 (Reuters) - The dollar edged lower in Asia on Tuesday as the slide in U.S. Treasury yields over the past two weeks gave investors less incentive to buy the greenback, while a sharp fall in Portuguese bond yields bolstered the euro.
The recent fall in U.S. yields came after top Federal Reserve officials, including Chairman Ben Bernanke, stressed that the timing of any reduction to the central bank's $85 billion in monthly purchases would depend on economic data.
Soft U.S. housing data on Tuesday led to dollar selling and added to the perception that the Fed has no reason to rush to trim its stimulus programme.
"There are fewer fears of an imminent Fed tapering, and yields on U.S. Treasuries are off their recent highs," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
"With the Japanese election out of the way, resulting in a confirmed victory for Prime Minister Abe, there is no particular reason to sell yen right now. So we'll be looking at U.S. data for near-term directional signals," he added.
Japanese Prime Minister Shinzo Abe's bloc won a widely expected victory in elections for the parliament's upper house on Sunday.
While the Fed is eventually expected to taper its stimulus, the Bank of Japan is committed to keeping its ultra-easy monetary stance as it aims for consumer inflation of two percent within two years, even against a backdrop of an improving domestic economy.
On Tuesday, the Japanese government raised its view on the economy for a third straight month in July and said deflation was abating as a result of the nation's expansionary policy mix of monetary easing and generous spending.
The assessment is in line with the BOJ's view that the world's third-largest economy is finally recovering, boosted by the effects of a weakening yen and its massive monetary stimulus.
Separately, an annual government economic report said on Tuesday Japan's economy is showing some signs of bouncing back from prolonged deflation as a result of Abe's monetary easing and budget spending to revive the economy.
The dollar dipped to a one-week low of 99.13 yen in early trading but then quickly pared losses to buy 99.55 yen, down slightly from late U.S. trade.
Dealers said liquidity had dried up amid the northern summer vacation period and there had been a general trimming in short positions of everything from the Australian dollar to the yen and gold.
"We've hit the summer lull and volatility has dropped right off," said a trader at an Australian bank. "The longer-term outlook is still for dollar strength given the Fed is much closer to tapering than any other major, but for now people are just trading on technicals."
The euro was up about 0.1 percent at $1.3199, after touching a one-month high of $1.3218 in the previous session. The dollar index, which tracks the greenback against a basket of major rivals, fell slightly to 82.153, holding above a one-month low of 82.047 hit overnight.
The euro won some respite from political worries after Portuguese President Anibal Cavaco Silva said the current government will stay in office to keep an international bailout on track. That led the spread of Portuguese bonds over German bunds to narrow..
The Australian dollar also managed to recoup ground, rising about 0.3 percent to $0.9275, though it faces stiff resistance in the $0.9292 to $0.9306 area.
Australian inflation data due on Wednesday will also present another test, as a low result would fuel speculation of an August rate cut from the Reserve Bank of Australia. Also on Wednesday, HSBC will release its flash PMI for China.