The dollar slipped, shedding earlier gains against the euro on Tuesday in a wave of profit-taking as traders said the US currency's rally had become overextended, but cited few fundamental reasons for the reversal.
Earlier, the greenback had hit a 27-month peak against the yen and a two-year high against the euro ahead of testimony by Ben Bernanke, the nominee for Fed chairman.
Initially, the dollar gained modestly as Bernanke's first round of testimony had broadly reinforced the currency market's view that US interest rates would continue to rise, burnishing the allure of dollar deposits to foreign investors. US economic data had also briefly helped support the dollar.
"Bernanke's impact is to continue to affirm the market view that rates will continue to rise and the dollar is to get interest rate driven support," said Michael Jansen, currency strategist at National Australia Bank in New York.
Bernanke vowed to fight for US price stability and said he would carry on with the policies of the current Fed chief, Alan Greenspan.
The dollar slipped moderately after Bernanke said that the US economy was in strong recovery and that the main risk to inflation was energy prices. Bernanke added that US core inflation remained low and that the Fed must ensure there are no second-round effects from oil prices. He called for efforts to begin to try to reduce the US budget deficit. On currency issues, Bernanke said that China was likely to move "somewhat slowly" in allowing its yuan to trade more flexibly.
In late trading, the euro was at $1.1720, up 0.2 percent from late Monday. Against the yen, the dollar was at 118.84 yen, up about 0.1 percent. The dollar had earlier climbed as high as 119.42 yen, according to Reuters data. Traders said a major options barrier had been smashed at 119.00.
Against the Swiss franc, the dollar was virtually flat at 1.3166 francs.
The Federal Reserve's campaign since June 2004 to tighten credit, which has taken short-term interest rates to 4 percent from 1 percent, has drawn more investors to the dollar and US bonds. Several economists see these overnight rates rising to at least 4.5 percent next year.
The dollar got an early boost as a stronger-than-expected rise in producer prices reinforced expectations for higher US interest rates.
But the dollar surrendered some of its earlier gains as investors mulled a surprise 0.3 percent decline in October's core producer price index, stripped of volatile food and energy costs. They had expected core PPI to rise 0.2 percent.
Declining auto prices accounted for the fall in core PPI.
Producer prices, received by manufacturers, farmers and oil producers, rose 0.7 percent as surging natural gas and home heating oil costs outweighed cheaper gasoline, a government report showed. Wall Street had expected prices to be flat.
Meanwhile, Chicago Fed President Michael Moskow said on Tuesday that more Fed rate increases are "appropriate" and that nobody can answer whether the Fed will stop at a "neutral" monetary policy.
Such hawkish comments from the Fed were in stark contrast to pointed criticism from the Japanese government this week on that country's monetary policy, comments which have prompted market players to think the Bank of Japan will be cautious about lifting rates from virtually zero, a level which has hobbled the yen this year.
But the dollar's advance against the yen has prompted talk of Japan's central bank taking action.
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