The euro inched up against the dollar on Wednesday, after being knocked from a 10-week high above $1.3000 the previous day due to profit-taking ahead of euro zone bank stress test results this week.
Traders were also looking to Federal Reserve Chairman Ben Bernanke's semi-annual testimony before Congress on Wednesday and Thursday, with investors listening for any comments that could boost speculation about more monetary accommodation.
A rise in U.S. share prices late on Tuesday appeared to be driven by speculation of more easing steps from the Fed. Thus, the lack of a hint on further easing in his testimony could hurt the dollar, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking Corp.
The euro moved little in Asian trade, changing hands at $1.2885, up less than 0.1 percent from late U.S. trade.
It rose as far as $1.3029 on trading platform EBS on Tuesday, its highest since May 10, but has been unable to hold above $1.3000 after testing it for three days in a row.
Traders said players were likely to keep taking profits in the near term on the euro's sharp rally which has taken it up more than 8 percent since it hit a 4-year low of $1.1876 in early June.
But there was also talk of bids in the euro at $1.2860/65 and then at $1.2820, with a mixture of stop-loss sell orders and bids then expected around $1.2780/2800. On the charts, former resistance at about $1.2770-90 has now turned into support.
Losses in the euro are expected to be limited before the stress test announcements due on Friday, with some analysts saying the results could soothe concerns about how European banks would cope with a deterioration in the region's economy and financial markets.
Players want to trim long euro positions as they have kept buying euros since early June, said Tsutomu Soma, senior manager of the foreign securities department at Okasan Securities.
But many continue to bet the euro will remain on an upward trend, partly due to the dollar's weakness.
Against the Japanese currency, the euro dipped 0.3 percent to 112.25 yen.
The dollar fell 0.4 percent to 87.13 yen, as Japanese exporters lowered their offers after they saw the currency hitting a new seven-month trough of 86.27 yen on EBS.
But buying from retail Japanese investors and margin traders is providing the greenback with some support, traders said.
A string of weaker-than-expected data in recent weeks has fanned fears about a slowing U.S. recovery, prompting investors to cut long positions in the greenback.
Data showed on Tuesday that U.S. housing starts fell more than expected in June to their lowest level in eight months, further evidence that the economy has lost momentum in the second quarter.
Traders said the dollar is under pressure partly because expectations for a U.S. interest hike in 2011 are fading and are being replaced by speculation about further easing.
The two-year U.S. Treasury note yield hit a record low, and it now yields about 20 basis points less than two-year German bonds.
Until less than a month ago, U.S. notes yielded more than German debt. Some analysts said the reversal in the bond yields spurred buying in the euro.
With interest rate differentials playing a key role in currency markets, Bernanke's comments could set the tone of the markets in coming weeks, traders said.
Bernanke could hint at further monetary policy easing, although the possibility of actually relaxing the Fed's policy is nearly zero, said Hideki Hayashi, global economist at Mizuho Securities.
Such a hint is likely to warm up investor appetite, lifting share prices.
But how that could move the dollar's exchange rates is hard to predict, Hayashi said.
Last week, the Federal Reserve downgraded its economic outlook for this year but stuck with its prediction of trend to above-trend growth in 2011.
(Additional contribution by Hideyuki Sano and Reuters FX analyst Rick Lloyd in Singapore; Editing by Joseph Radford)