Sterling was pinned near a six-month low versus the dollar on speculation the Bank of England will soon join other major central banks in easing monetary policy in response to growing worries about the global economy and Britain's exit from the European Union.
Fed chief Jerome Powell's comments in two-day testimony to Congress beginning on Wednesday will be watched to determine whether traders will continue to reduce bets for deep interest rate cuts, which could help the dollar continue its rebound against major currencies.
"There were simply too may dollar shorts built up before Powell's testimony," said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.
"Now people are really starting to question why there were expectations for a 50 basis point cut. People who sold the dollar around 107 yen are starting to suffer."
The dollar index versus a basket of six major currencies was little changed at 97.366 on Tuesday, which was close to a three-week high of 97.443 hit on Friday.
The greenback briefly rose to a six-week high of 108.90 yen on Tuesday before settling at 108.68 yen, little changed on the day.
Investors will closely analyse Powell's comments when he delivers his semi-annual monetary report before Congress to gauge how far the U.S. central bank will lower interest rates.
A sharp rebound in U.S. job growth in June reduced expectations that the Fed will cut interest rates by 50 basis points when it meets at the end of July.
A week ago, the market forecast an 80.1% chance of a 25-basis-point cut, and a 19.9% chance of a 50-basis-point cut, according to CME Group's FedWatch tool. The chances are now 97.5% and 2.5%, respectively.
"The dollar is bouncing back, so there are some downside risks for the euro and cable," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
"There is a risk the Fed will not be as dovish as people thought. Central banks ahead of the curve in this cycle are Australia and New Zealand. The Fed is following, but the European Central Bank and the Bank of England are laggards."
The British pound was last quoted at $1.2515, within striking distance of $1.2481, its lowest since the "flash crash" on Jan. 3 when the pound dropped to $1.2409.
Data on UK gross domestic product and industrial output are due Wednesday, while the Bank of England will release its financial stability report on Thursday, which could help traders gauge whether the BoE will take a more dovish view of the economy.
Last week BoE Governor Mark Carney said a global trade war and a no-deal Brexit were growing risks to Britain's economy, which might need more help to cope with a downturn. That prompted investors to increase their bets on a BoE interest rate cut.
The euro traded at $1.1210, near a three-week low of $1.1207.
The Turkish lira was steady in Asia after weakening sharply following President Tayyip Erdogan's dismissal over the weekend of the central bank governor, sparking worries about the bank's independence.
The lira at one point slid to a two-week low of 5.8245 to the dollar and was last quoted at 5.7355.