The dollar held near a one-month low against a basket of currencies on Tuesday after Federal Reserve Chairman Ben Bernanke signalled that a supportive monetary policy would remain and kept alive hopes of more monetary stimulus for the U.S. economy.
The dollar index was at 78.937, stuck near a low of 78.870 hit on Monday when Bernanke said the central bank's policy of very low interest rates was needed to reduce unemployment and made it clear he was in no rush to reverse course.
"His argument that unemployment was largely cyclical rather than structural caught the market's imagination," said Sebastien Galy, strategist at Societe Generale.
"It suggests QE3 is on its way or at least a very dovish stance until such a point as unemployment falls enough," he said, referring to another round of bond buying or quantitative easing.
On Monday, Bernanke's comments coupled with an unexpected rise in German business sentiment gave risk appetite a boost, lifting the euro and weighing on the safe-haven yen.
The euro eased 0.1% from late U.S. trade on Monday to $1.3351, having hit a one-month high of $1.3368 on Monday on trading platform EBS.
The single currency faces resistance at $1.3373, the 76.4% retracement of its late February to mid-March fall.
Moves in U.S. Treasuries could be key for the dollar at this juncture, said a trader for a major Japanese bank in Singapore.
If buying of Treasuries gains steam and bond yields fall in the wake of Monday's Bernanke's comments, the dollar could face more pressure against currencies such as the euro, he said.
Concerns about peripheral euro zone debt, however, could pose a risk to this view, the trader added.
Worries are growing about Spain after a government setback in regional elections, making Prime Minister Mariano Rajoy's task of pushing through harsh spending cuts more difficult.
YEN STEADIES AFTER DROP
Against the yen, the single currency was steady at 110.63 yen, not far from a 4-1/2 month high of 111.43 set last week.
The dollar inched up 0.1% versus the yen to 82.87 yen , having pulled away from Friday's trough of 81.97.
There was talk of dollar-buying by hedge funds as well as dollar-buying by Japanese importers, but also talk of dollar selling interest by Japanese exporters above 83.00.
Japanese importers have been steady dollar buyers over recent weeks as their purchases of fossil fuels have surged after most nuclear reactors in Japan went offline in the wake of the Fukushima disaster.
Bernanke's comments lent support to commodity currencies, which were hit hard last week by growing fears of a hard economic landing in China.
The Australian dollar dipped 0.2% to $1.0517, giving back some ground after rising about 0.7% on Monday, but stayed well above last week's two-month low of $1.0336.
