Dollar weakens as Yellen indicates no rush to raise rates

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The dollar fell against a basket of currencies on Wednesday as traders trimmed their greenback holdings following Federal Reserve Chair Janet Yellen's suggestion that the U.S. central bank would not rush into raising interest rates.

The drop in the dollar mirrored a pullback in yields on shorter-dated U.S. Treasuries from recent highs, as Yellen's testimony to U.S. lawmakers disappointed investors who had positioned themselves for a clearer signal whether rates might rise as early as mid-year.

The two-year U.S. Treasury note yield touched a two-week low on Tuesday partly on Yellen's perceived dovish comments.

Yellen declined to provide much insight into when the word "patient" might be dropped from the Fed's policy statement and instead emphasized that dropping the word would not necessarily portend rate hikes were imminent.

Whether to raise rates will depend on economic data and will be decided on a meeting-to-meeting basis, she said.

"She managed to reduce expectations of a rate hike in June. She also gave herself a lot of leeway to react to incoming data," said Sebastien Galy, currency strategist at Societe Generale in New York.

U.S. new home sales fell less than forecast in January, holding near their fastest pace since June 2008.

Read MoreFed won't raise rates at all this year

Yellen appeared before the House Financial Services Committee a day after her testimony before the Senate Banking Committee. She did not offer additional insight on the timing of a rate increase before the House panel.

The dollar index fell for a second day and was last down 0.3 percent at 94.229, with the greenback shedding ground against almost every major currency.

The dollar edged down 0.08 percent against the yen to 118.890 yen. Sterling was up 0.45 percent to $1.5524 after touching an eight-week high of $1.5538.

The euro gained against the dollar for a second day in the wake of Greece receiving a four-month extension on a bailout from its euro zone partners.

Despite doubts about Greece's ability to repay its debt, the temporary measure reduced anxiety about the debt-laden nation departing from the economic bloc, analysts said.

The euro zone single currency was up 0.2 percent at $1.13590 and 0.1 percent at 135.060 yen.

The dollar's drop was seen as temporary. The Fed still appears to be on track to raise rates this year, although probably not in June as some large banks had forecast.

In contrast, the European Central Bank is beginning a 60-billion-euros-a-month bond-buying program next month. The Bank of Japan is already deep into a similar quantitative easing program. That makes the dollar a buy on dips, traders said.