The dollar hit multi-month lows against major currencies on Tuesday, stung by speculation that U.S. interest rates will stay low, while technical factors kept the currency under selling pressure.
The dollar index, a measure of its value against a currency basket, fell to 80.539, its weakest since mid-April and marking its first break since January below its 200-day moving average, a move that analysts said would open the door to more losses.
The euro hit a six-month high of $1.3242 according to Reuters data, while the dollar fell to 85.86 yen, its weakest since November 2009.
Negative sentiment for the U.S. currency grew after Federal Reserve Chairman Ben Bernanke said on Monday that the economy has yet to recover fully and monetary policy must remain accommodative.
Also stinging the dollar was the two-year U.S. Treasury yield's drop to a record low 0.534 percent. It has fallen faster than its euro zone counterpart, further weakening demand for short-term U.S. debt and reflecting the market's view that U.S. rates will stay low.
The jury is still out on the U.S. recovery in Q2, Q3 and Q4, but the market is taking the more pessimistic view, said Kenneth Broux, market strategist at Lloyds TSB.
The greenback has slid over the past month after a run of disappointing U.S. data fueled expectations that U.S. growth could lose momentum as official stimulus is withdrawn.
The Wall Street Journal on Tuesday reported that, given signs the economy is losing momentum, Fed officials will mull whether to use cash the central bank receives from maturing mortgage bond holdings to buy new mortgage or Treasury bonds, rather than allowing its portfolio to shrink gradually.
By 5:40 a.m. ET, the dollar index .DXY traded at 80.598, down 0.4 percent on the day, after breaking below its 200-day moving average at around 80.722 according to Reuters data.
The euro traded 0.4 percent higher at $1.3230, while the U.S. currency was 0.5 percent lower at 86.03 yen.
AUSSIE TRIMS LOSSES
Technical analysts said the euro's break above a Fibonacci retracement level against the dollar on Monday was adding to the common currency's upward momentum.
Technically, we've broken levels that should have held if we were to be trending south in euro/dollar, said Dag Muller, technical strategist at SEB in Stockholm, adding he saw a climb to $1.33 in the near term.
The euro's break was through $1.3125, the 38.2 percent retracement of its decline from November to June. Having made a decisive break above that level, investors focused on $1.3510, the 50 percent retracement of the November-June move.
The euro raced higher in early European trade, but gains petered out in the lower $1.32 region, keeping the single currency hovering around where options at $1.32, $1.3220 and $1.3250 were seen expiring later in the day.
The Australian dollar traded at $0.9110, down 0.2 percent on the day but trimming losses made after retail sales and building approvals data in Australia disappointed bulls.
The RBA held its benchmark interest rate at 4.5 percent, as widely expected, and some traders covered Aussie shorts following a lack of negative surprises in the RBA's statement, which said policy was appropriate given moderating inflation and uncertainty about the global outlook.
(Editing by Andrew Heavens)