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LONDON: The dollar paused for breath on Tuesday as traders looked to testimony from Federal Reserve Chair Jerome Powell for further guidance on the recent surprise shift in the central bank's policy outlook, while support crept back for cryptocurrencies.

The greenback had gained sharply since the Fed last week flagged sooner-than-expected interest rate increases, although it dipped on Monday to hand back a little bit of that rise.

Against the euro, the dollar nursed an overnight loss of about 0.4% to steady at around $1.1890. It crept higher to 110.42 yen, while the dollar index was 0.1% higher at 92.078 after a loss of about 0.5% on Monday.

The Australian and New Zealand dollars eased after Monday's bounce from multi-month lows, with the Aussie down 0.5% to $0.7504 and the kiwi down 0.2% to $0.6975.

"The dollar index has seen a steady decline since March, however, since the Fed announcement we've seen a swift reversal as market positioning is set to reverse and the recent build up in net USD shorts are squared off," said Ali Jaffari, head of North American capital markets at Validus Risk Management.

"This renewed momentum in USD is expected to continue in the near to medium term as a hawkish Fed paints a majestic picture of hiking rates faster and sooner."

In the medium term, investors will be keenly focused on the US labour market as its performance is likely to influence the Fed's attitude. In the nearer future all eyes are on Powell, who appears before Congress from 1800 GMT.

In prepared remarks he noted sustained labour market improvement and the recent increase in inflation.

"We suspect that, unlike the hawk Bullard, Fed Chair Powell could advocate a start of the tightening cycle in 2023 and thus help calm the market's nerves in the very near term," said Valentin Marinov, head of G10 FX research at Credit Agricole.

"To the extent that the Fed signals of a more gradual pace of stimulus removal help soothe the worst of market fears, risk-correlated currencies could recover."

On Monday, hawkish Fed officials such as St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan remarked on the risks of acting too slowly.

However, New York Fed President John Williams said it was too soon to shift policy, and that he expects inflation to ease from about 3% this year to close to 2% in 2022 and 2023 - leaving markets none the wiser. Fed member Loretta Mester is also due to make a speech on Tuesday.

Elsewhere, sterling fell 0.4% to $1.3873, holding on to its overnight bounce as investors look forward to the British economy reopening further on July 19.

Bitcoin and other cryptocurrencies found something of a footing after slumping on Monday when a tightening crackdown on trading and mining in China, as well as technical factors, whacked the asset class. On Tuesday, they held just above May lows, with bitcoin at $31,337 and Ether at $1,861.

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