The dollar hit its lowest level in four weeks against a basket of major currencies on Tuesday, extending falls from the previous day after Federal Reserve Chairman Ben Bernanke kept the door open for more monetary easing in the United States.

Analysts said the dollar may suffer further short-term falls if speculation over a third bout of quantitative easing persisted, but any data pointing to a pick-up in U.S. economic activity could see the currency claw back losses.

The dollar index .DXY fell around 0.2 percent to 78.770, its weakest since March 2, after Bernanke said on Monday a policy of very low interest rates was needed to reduce unemployment, making clear he was in no rush to change course and tighten policy sooner than pledged.

The economy is doing a lot better than many people thought and the market is going to run with that, but the Fed will not stand around while U.S. yields back up significantly, said Neil Mellor, currency strategist at Bank of New York Mellon.

There will be a cat and mouse game between the market and Bernanke, I think the dollar will be in a range for some time.

A recent run of better-than-expected U.S. economic data prompted Treasury yields to rise in March, pushing the dollar higher as its appeal as a funding currency dimmed. The next data focus for market players will be U.S. consumer confidence figures at 1400 GMT.

Market players said the euro's rise to $1.3385, its highest level in a month against the broadly weaker greenback, could also be short-lived.

The euro extended gains after breaking above Monday's high of $1.3368, traders said, helping it pull well away from the mid-March low just above $1.30. However, the shared currency later eased to trade last at $1.3356, flat on the day.

Technically, the euro has had a decent retracement from the mid-March lows around $1.30 and the bias is for a little more upside, said Elsa Lignos, currency strategist at RBC.

The euro was helped by a fall in the cost of insuring against Spanish or Italian debt default on expectations a reinforced euro zone rescue fund would be agreed this week. It also drew support from Germany's signal on Monday that it was willing to increase the resources available to tackle the region's debt crisis.

But worries remained that the crisis would continue to deepen in Spain, Italy and Portugal. High borrowing costs in Spain were of particular concern before the government presented its budget on Friday.

In the short term there could be more upside for euro/dollar but not much. I can't see a move above $1.35 being sustained given the situation in Europe, said Niels Christensen, currency strategist at Nordea in Copenhagen.


Traders and analysts said moves in U.S. Treasuries would be key for the dollar. If demand for Treasuries gained steam and bond yields fell in the wake of Bernanke's comments, the dollar could face more pressure.

The greenback was up 0.1 percent against the yen at 82.90 yen, below a recent 11-month high of 84.19 yen.

The Japanese currency was seen as vulnerable to more selling, and has been under heavy pressure since Japan announced monetary easing measures last month.

Elsewhere, the Australian dollar fell 0.1 percent to US$1.0520 but held well above last week's two-month low of $1.0336. Some strategists said expectations of more quantitative easing from the Federal Reserve could boost the commodity currencies given their high yields relative to the U.S. dollar.