Dollar rises from 6-week low vs. euro

Greenback makes up ground after the Federal Reserve chairman testifies on the state of the economy.

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NEW YORK (Reuters) -- The dollar rebounded from six-week lows against the euro Tuesday after Federal Reserve Chairman Ben Bernanke gave a cautious assessment on the U.S. economy, reviving the greenback's safe-haven appeal.

A retreat in U.S. stock prices also dampened investors' appetite for risk, driving the yen sharply higher while pushing down higher-yielding, commodity currencies like the Australian and New Zealand dollars.

Bernanke, in his testimony before the House Financial Services Committee, said unemployment was likely to remain high into 2011, which he warned could undermine consumer confidence and derail a recovery. He also said interest rates will stay low for an extended period and expressed concerns about the U.S. budget deficit.

"His comments have been construed as reasonably dovish, generally advising caution on the timing and extent of the economic recovery," said Samarjit Shankar, director of global foreign exchange strategy at the Bank of New York Mellon in Boston, adding that "has led to a slight pullback in risk appetite."

In afternoon trading in New York, the euro fell 0.3% to $1.4185, having climbed to six-week highs earlier in the day at $1.4277, according to Reuters data.

Against the yen, the dollar fell 0.7% to ¥93.54, while the euro was down 1% at ¥132.71.

Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn., said Bernanke's "cautious tone" threw the dollar a lifeline.

"His bottom-line assessment that the U.S. economy is still nowhere near ready for a policy reversal flew in the face of equity market investors who have been busily discounting a return to growth," he said.

The ICE futures' dollar index, a measure of the greenback's value against a basket of six currencies, was little changed at 78.950. The index had earlier fallen to 78.591, its lowest since early June.

Risk rally retreats

Risk appetite had improved over the last few sessions after a string of stronger-than-expected U.S. corporate earnings for the second quarter boosted optimism about the economy.

Heavy equipment maker Caterpillar (CAT, Fortune 500), for instance,posted a second-quarter profit and gave an upbeat earnings outlook for 2009.

Some analysts, however, sounded a note of caution on recent U.S. earnings.

"I would say that the earnings beats were the slightest of margins. There were a couple of misses on the revenue side," said Jacob Oubina, senior currency strategist, at in Bedminster, N.J.

"So a lot of the earnings generated in the second quarter were due to cost-cutting measures, mainly on the employment side. The sustainability of the beats as we head into the fourth quarter is therefore questionable," Oubina said.

The U.S. dollar, meanwhile, retraced losses against the Canadian dollar to trade higher on the day at C$1.1082.

The greenback had earlier fallen to session lows at C$1.0967 after the Bank of Canada left interest rates at a historic low of 0.25% and gave an upbeat economic forecast.

The pound underperformed, trading down 0.7% at $1.6428 after public finances data showed the worst June performance on record, with net debt standing at 56.6% of gross domestic product. To top of page

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