SYDNEY, Mar 21 (Reuters) The dollar was steady to slightly firmer on Tuesday as a holiday in Tokyo kept volumes light and investors tensed for a speech by US Federal Reserve Chairman Ben Bernanke.
Bernanke is due to speak on the Treasury yield curve and monetary policy at 7 p.m. EST (0000 GMT).
''This is the first time the new Fed Chairman has spoken to an audience other than politicians and it's a week before the next policy meeting, so it's no wonder people are tense,'' said Rory Robertson, interest rate strategist at Macquarie Bank.
''Fed chairmen are not in the business of rocking the market, but if Bernanke has something to say about policy, this would be the time,'' he added. ''Then again there's not much mystery to policy right now. The Fed's made it clear future rate moves will depend on the how the data pans out.'' Last week the dollar fell 2 per cent against a basket of major currencies after tame inflation data forced the market to scale back expectations for how high interest rates might rise this year.
A tightening to 4.75 percent is fully priced in for next week's Fed meeting, but investors are now less certain it will move to 5 percent in May.
Early Tuesday, the euro was sitting at $1.2157 compared to $1.2167 late in New York, some way short of last week's seven-week high of $1.2207.
Against the Swiss franc, the dollar was little changed at 1.2912 francs , from 1.2908 francs in New York. Sterling eased slightly to $1.7552 , from $1.7562.
The dollar extended a bounce on the yen to 116.41 yen from 116.24 late in New York. Volumes were thin with Tokyo on holiday for the Spring equinox. The dollar had dipped as deep as 115.53 yen in New York after a Bank of Japan official said the bank was ready to raise its benchmark overnight interest rate from zero percent ''at any time.'' Japan can most likely take a ''gradualist'' approach to monetary policy normalisation given the low risk of significant inflation, said BOJ policy board member Atsushi Mizuno.
But he added the outlook for monetary policy was completely open and the bank could envision a scenario in which upward pressure on short-term interest rates encouraged an early rate hike.
Still, the initial fall in the dollar attracted sizable buying before the 115.50 level and the dollar quickly recovered.
The general tightening in liquidity conditions around the globe has already had ripple effects by making leveraged positions less attractive.
Many hedge funds had borrowed in low interest rate currencies, such as the yen and Swiss franc, to lend in higher yielding currencies such as the Australian and New Zealand dollar.
Now those positions were being pared back, sending the Australian dollar to an 18-month low on the US dollar and the Kiwi currency to a 21-month trough.
Traders said a major US investment bank had on Monday issued a ''sell'' recommendation on the South African rand and the entire Aussie, Kiwi and Canadian dollar bloc, and suspected the bank had backed it words by selling the currencies short.
REUTERS VJ RAI0507