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Yellen's 'dovish stare' may crack at testimony

Janet Yellen, Chair of the Federal Reserve.
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Janet Yellen, Chair of the Federal Reserve.

Federal Reserve Chair Janet Yellen, facing tough questions from U.S. lawmakers this week on health of the U.S. economy and the timing of the first Fed rate hike, will be under pressure to acknowledge an uptick in inflation and improvement in the labor market.

Such an admission would mark a significant shift in tone towards a more hawkish rates outlook, a development which would help buoy the U.S. dollar or at least help put a floor in the currency, strategists told CNBC.

"I think it is too soon to expect a less dovish tone from her," said Jens Nordvig, global head of G10 FX strategy at Nomura. "Eventually the tone from the FOMC (Federal Open Market Committee) will shift, but I think September-October is the more likely timing."

Read MoreDovish Fed pushes back on rate hike speculation

Yellen delivers her closely-watched semi-annual monetary policy testimony to the Senate Banking Committee on Tuesday and to the House Committee on Financial Services on Wednesday.

Exactly what tone Yellen will strike during the testimony is dividing currency analysts.

"It seems hard to be incrementally dovish from what she has already expressed," Nizam Idris, head of strategy, fixed income and currencies at Macquarie Bank. "With the end of QE3 (quantitative easing) now within sight, she may have to explain what comes next, and that has to include a precursor to hiking rates."

"However improbable it may sound, I think the risk is Yellen could be seen as marginally hawkish at this week's testimony," Idris added.

Read MoreFed minutes: QE likely to end in October

CNBC's latest survey of forex market professionals underlines the split in opinion on the dollar's near-term direction. Forty-three percent of respondents (or 13 out of 30) expect the dollar to extend losses while a similar number are calling for a gain. Just four out of 30 respondents are neutral on the greenback this week.

Reinforcing the bullish case for a dollar snapback, latest data from IG Markets show 83 percent of their more than 501 clients with open positions are betting on a firmer greenback against the yen.

Although this week is heavy with U.S. data with June retail sales on Tuesday, industrial production a day later and the Fed's 'Beige Book' survey of regional business conditions on Thursday, Yellen's testimony "will probably trump anything the data calendars have to offer," said Ray Attrill, co-head of forex strategy at NAB. "If she's still refusing to blink from her dovish stare, the dollar is likely to struggle."

Read MoreWhen do we get off the Fed treadmill?

Still, Saktiandi Supaat, Head of Global FX Strategy at Maybank said if this week's numbers are strong then the Dollar Index may see "upside moves" within the 79.50 to 80.50 range.

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