(Reuters) - The dollar fell against the euro and other major currencies on Tuesday before testimony from Federal Reserve Chairman Ben Bernanake who could hint at more monetary stimulus after recent disappointing U.S. data.
With most investors positioning for more quantitative easing by the Fed, analysts saw a risk that the dollar may bounce or assets such as stocks and growth-linked currencies could drop if Bernanke stopped short of signalling more easing.
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The Fed last month expanded efforts to keep long-term interest rates low by announcing it would buy an additional $267 billion in long-term bonds while selling short-term securities.
However, it held off from launching a third round of outright bond purchases that would expand its balance sheet, a form of stimulus known as quantitative easing (QE). Bets on more QE grew after disappointing U.S. retail sales data on Monday.
"The market is positioned aggressively for more QE, but I think Bernanke would want to wait for a bit more data, which leaves it at risk of a disappointment and a dollar bounce," said John Hardy, FX strategist at Saxo Bank.
The dollar index was down 0.1 percent at 83.03, having slipped to 82.911, its lowest since July 6 and on track for a third day of losses. It has near-term support at 82.60/70, the intra-day highs of June 26 and 27.
The dollar was also stuck near one-month lows against the yen, trading at 78.90 yen.
Strategists at Citi said Bernanke was likely to leave the door open just enough to give investors some hope for additional measures without making a concrete commitment and without being clear on the timing.
And while this would keep the dollar somewhat weaker against most major currencies except the euro, any bounce in the common currency was likely to prove fleeting, given the problems in the euro zone, they added.
The euro climbed to a one-week high at $1.2314, having triggered stop-losses at $1.2300. It was last at $1.2302, up 0.2 percent on the day though still close to a two-year low of $1.2162 hit last week.
Traders said the huge bets against the euro raised the chance of a short squeeze, but elevated peripheral euro zone bond yields would keep gains limited.
Germany's Constitutional Court said on Monday it would not rule until September 12 on whether Germany can legally ratify the euro zone's permanent bailout fund.
That delay, along with expectations the ECB will again cut interest rates would weigh on the single currency, traders said. A disappointing ZEW survey of German analyst and investor sentiment could also hit the euro.
FUNDING CURRENCY
Analysts said that despite Tuesday's nudge higher, the euro has become the funding currency of choice after the ECB cut its deposit rate to zero earlier this month. This meant the 800 billion euros that banks were parking with the ECB would leave the euro zone in search of better yields.
The euro hovered near a record low against the high-yielding Australian dollar, trading at A$1.1936. It was also near a 3-1/2 year low against sterling and not far from a 11-1/2 year low against the Swedish crown.
The Aussie dollar was also higher at $1.0291, helped by minutes that showed Australia's central bank saw "no need" to cut interest rates at its July meeting because a material easing had already been delivered and data showed the domestic economy had more momentum than first thought.
The Aussie gained against the yen to 81.31 yen while the euro gained 0.4 percent to 97.16 yen.
The Canadian dollar was also higher, trading at C$1.0137 per U.S. dollar before a Bank of Canada rate decision. It is widely expected that the BoC will hold its main policy rate at 1 percent, but the focus will be on whether it will repeat, dilute or omit the message that it may soon need to raise rates.
