The U.S. currency gains ground against rivals amid uncertainty over the Federal Reserve chairman's testimony.
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July 21, 2009: 6:34 AM ET
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LONDON (Reuters) -- The dollar edged higher on Tuesday in a slight recovery from sharp falls the previous session as caution set in ahead of Federal Reserve chairman Ben Bernanke's congressional testimony.
Bernanke will start his twice-yearly testimony on the economic outlook and monetary policy before the House Financial Services Committee at 10 a.m. ET.
The Fed chief gave some hints on the tone he is likely to strike, highlighting in a Wall Street Journal article that the central bank has a strategy for removing its accommodative measures once a recovery takes hold.
He said the Fed's exceptionally easy policies would be warranted "for an extended period", but added the huge amounts of money pumped into the economy will not reduce its ability to push borrowing costs higher when it is needed.
Analysts said the remarks helped remove some of the uncertainty surrounding the testimony, but caution remained and investors were tending to shy away from the riskier trades of the previous day, when the dollar tumbled to a six-week low on a trade-weighted basis.
Perceived higher risk currencies gained sharply on Monday after news of a rescue deal for U.S. lender CIT Group (CIT, Fortune 500), but nerves set in again ahead of more U.S. corporate earnings, with State Street (STT, Fortune 500) and Coca Cola (KO, Fortune 500) due to report on Tuesday.
"There has been a bit of lightening of risk positive trades before Bernanke's testimony," RBS currency strategist Paul Robson said.
"But some of the event risk has been taken away by the Wall Street Journal and it is hard to imagine that Bernanke will say anything that will seriously undermine risk appetite," he added.
The euro slipped 0.2% to $1.4202 after touching a six-week peak of $1.4250 on trading platform EBS the previous day.
The dollar index edged up 0.1% to 78.951, though it continued to hover not far above a six-week low of 78.799 hit on Monday.
Among higher risk currencies, sterling fell 0.6% to $1.6441, while the Australian dollar fell 0.4% to $0.8123 .
The yen also gained as investors took risk off the table, with the dollar down 0.2% at 94.01 yen and the euro down 0.3% at 133.58 yen.
0:00 /4:42'Panic is over, crisis is not'
Despite laying out some of the Fed's exit strategy plans, traders and analysts said Bernanke's comments in the Wall Street Journal did not sound anxious about removing excess stimulus from the system.
"The article is laying out the groundwork that there's not going to be any immediate rate hikes, which is no news, and just outlining a few options the Fed has when the time is right to take liquidity out of the market," a senior trader at a European bank in Hong Kong said.
"But the key thing is the time's not right."
Elsewhere, the Canadian dollar fell, with the U.S. dollar up 0.1% at C$1.1077, ahead of a Bank of Canada policy decision, where it is expected to leave rates at a historic low 0.25%.
The Australian dollar reacted little to the release of minutes from the Reserve Bank of Australia, which showed it grew more optimistic on the outlook for growth when it left rates steady at its meeting in July.
The RBA still saw scope for further easing, however, should an expected recovery not materialize.
