LONDON: The dollar fell against a basket of currencies on Tuesday as investors cut long bets ahead of testimony by Federal Reserve chief Ben Bernanke that could give more clues to when US monetary stimulus will be withdrawn.
But its losses against the euro were likely to be checked if euro zone inflation data later in the session shows subdued price pressures, as expected. That will add to the view that the European Central Bank will keep interest rates low and may even cut them further to aid an economic recovery.
Germany's ZEW survey is also due, with both economic sentiment and current conditions expected to show an improvement.
"Recent data out of Germany has been disappointing, so if the ZEW falls short of expectations we could see that undercut the euro," said Jane Foley, senior currency strategist at Rabobank.
The euro was up 0.2 percent to about $1.3085 with some large investors like Asian central banks likely to sell into any bounce towards $1.3120/50, traders said.
Its gains saw the dollar index drop 0.15 percent to 82.911. The index had set a three-year high of 84.753 on July 9, the day before Federal Reserve chairman Ben Bernanke's surprisingly dovish comments on stimulus withdrawal last week caused heavy selling of the US currency.
Disappointing US retail sales for June has also dented expectations of an imminent reduction in stimulus by the Fed, and weighed down on the dollar.
Bernanke is due to testify on Wednesday and analysts expect him to reiterate his stance that US monetary policy will remain accommodative. He is likely to keep alive expectations the Fed will start withdrawing its stimulus later this year, but at the same time make clear that the central bank will not tighten policy. That could trigger some sharp market swings.
"The testimony is a venue to explain the Fed board's thinking, rather than Bernanke's own ideas," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ. "So I would expect his remarks to be a bit more hawkish than last week."
The dollar eased 0.3 percent against the yen to 99.57 yen , staying above last week's low of 98.20 yen.
The yen could face some pressure towards the weekend on expectations that Japan's upper house election on Sunday will hand Prime Minister Shinzo Abe a big victory, giving him more freedom to push forward with his agenda to revive the economy through monetary easing.
Meanwhile, the Australian dollar bounced 1 percent to $0.9182 as market players trimmed back bets on further interest rate cuts following comments from the central bank.
The gains came after the Reserve Bank of Australia said in the minutes of its July meeting that the current policy stance was appropriate for the timing.
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