The dollar swung between gains and losses on Tuesday in a volatile session as Federal Reserve Chairman Ben Bernanke offered few hints that the US central bank was ready to offer more stimulus, although he said the Fed is prepared to boost a slowing US economy if needed.
Before Bernanke's testimony to the US Senate Banking Committee on Tuesday, investors had increased their bets that he would drop more hints about further monetary stimulus after the release of disappointing US retail sales data on Monday. When he failed to specify measures to lift the economy they covered shorts on the dollar, sending the US currency higher.
Another round of quantitative easing would weigh on the greenback because it would result in flooding the financial system with dollars, which would diminish the currency's value.
But as the New York trading session wound down, the euro again moved higher against the dollar as investors positioned for the next round of testimony from Federal Reserve Chairman Ben Bernanke. Bernanke addresses the House Financial Services Committee on Wednesday.
"Despite expectations by many market participants that the Fed chief would yield to calls for quantitative easing, his statement indicated nothing of the sort," said Neal Gilbert, currency strategist at GFT in New Jersey.
The euro hit session lows against the dollar at $1.2187 in the aftermath of Bernanke's comments. It was last at $1.2287, up 0.1 percent on the day. Weakness in the euro zone's shared currency, however, has not sparked that much demand for protection in the options market against further falls. Traders expect a gradual fall in the euro from current levels.
The cost of protection against further euro weakness actually cheapened on Tuesday, with puts - or bets the currency would depreciate - trading at 1.08 percent. Earlier this month, puts were at 1.5 percent.
The euro hit a 3-1/2-year low against sterling and fell to a record trough against the Australian dollar. The dollar fell against the Swiss franc, sterling and the New Zealand dollar.
Still, quantitative easing is not exactly off the table, said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
"The dollar may have limited upside scope," he said, which "should buy the dollar some time to test fresh highs." 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 under a program known as Operation Twist.
However, it held off from launching a third round of outright bond purchases that would expand its balance sheet, known as quantitative easing.
The greenback firmed 0.3 percent against the yen to 79.07 yen, a day after dropping to one-month lows. Expectations that the Bank of Japan could intervene and check gains by the yen kept investors wary, traders said.
Japanese Finance Minister Jun Azumi hit out at speculators betting on gains in the yen due to weak US economic data and hinted the government was prepared to intervene to stem excessive moves.