NEW YORK (CNN/Money) - Treasury bonds fell sharply Tuesday, with yields nearing 10-week highs, after Fed Chairman Alan Greenspan's testimony to Congress suggested there would be little unconventional involvement in the market by the central bank.

The dollar rallied against the euro.

Rep. Barney Frank (D-Mass.) talks about Greenspan's testimony on the state of the U.S. economy. Play video (Real or Windows Media)

Just before 3:45 p.m. ET, the benchmark 10-year note sank 1-22/32 of a point in price to 97-15/32 for a yield of 3.94 percent, up from 3.71 percent late Monday afternoon. The 30-year bond shed 2-18/32 points to 106-19/32 with a yield of 4.93 percent versus 4.76 percent late afternoon Monday. Bond prices and yields move in opposite directions.

The five-year note slid 30/32 of a point in price to 99-12/32 with a yield of 2.76 percent, and the two-year note dipped 5/16 of a point in price to 99-13/32 with a yield of 1.44 percent.

The dollar switched gears and rose against the euro and the yen on Greenspan's comments that the economy seems to be showing signs of improvement. The European currency bought $1.1185, down from $1.1280 late Monday afternoon. The dollar stopped its slide versus the yen, buying ¥117.89, up from ¥117.65 late afternoon Monday.

Investors' focus Tuesday was on the first day of the Fed Chairman's semi-annual testimony to Congress on monetary policy and the economy.

Traders were hoping he would say something to help ease pressure on the bond market. Greenspan said the Fed could keep rates low for a considerable period of time to spur growth and that there was room for "substantial further" cuts in interest rates, prompting an initial pop higher in bonds.

But the market was less pleased that he thought situations requiring unusual policy action were unlikely to arise. Traders have been hoping the danger of deflation would push the Fed into unconventional measures such as outright purchases of longer-term Treasurys.

"He pulled the rug out from under the long end by playing down the whole deflation/unconventional policy debate," Ifty Islam, head of U.S. fixed income strategy at Deutsche Bank Securities, told Reuters.

Bonds also took a hit early in the day from a better-than-expected report on retail sales. The Commerce Department said retail sales grew by 0.5 percent in June after being flat in May. Excluding motor vehicles, sales rose 0.7 percent after gaining 0.1 percent in May. Economists surveyed by Briefing.com expected to see rises of 0.4 percent overall and 0.3 percent excluding autos.

Meanwhile, a survey of New York State manufacturing dipped to 22.6 in July from 27.6 in June, still a reading that was stronger than expected by most analysts.

Traders also awaited a Consumer Price Index reading, due ahead of the open Wednesday, for indications of any signs of increasing inflationary or deflationary pressures.

After rallying for months, bond prices have begun to fall in recent weeks. But traders said if upcoming reports show indications that inflation pressures are declining, it would be possible to have another drop in yields to the lows hit in mid-June.  

-- Reuters contributed to this report.