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Written by: Staff

TOKYO, May 2 (Reuters) The dollar rose on Tuesday, extending a rebound from a one-year low against the euro and a seven-month low versus the yen, on a report that the Federal Reserve chief said markets had misread his congressional testimony.

CNBC television reported on Monday that Fed Chairman Ben Bernanke told one of its reporters that the central bank was still aggressive on inflation and it had a flexible, rather than a dovish, stance on monetary policy.

His comments triggered a wave of short-covering in the dollar, which had come under renewed pressure after Bernanke told Congress last Thursday that the Fed may pause hiking rates at some point in the future.

The market had taken that to mean the central bank would wrap up its two-year campaign of tightening policy after an expected bump up in rates to 5 percent at its May 10 monetary policy meeting.

''People had thought the Fed would stop raising rates and the dollar was oversold. So there has been a bit of a buy-back in the dollar,'' said a trader at a Japanese bank.

In early Tokyo trade, the dollar rose to around 113.70 yen from around 113.35 yen in late U.S. trade and up more than one yen from a seven-month low of 112.34 yen hit on Monday.

The euro slipped to around $1.2575, down more than one cent from Monday's one-year peak of $1.2691.

The euro ticked up to 142.95 yen from around 142.70 yen.

The U.S. currency has come under pressure from speculation that policy makers from the Group of Seven economic powers are eager to see a gradual fall in the dollar to correct the huge U.S. trade deficit.

While such speculation is seen continuing to hamper the dollar, a dose of U.S. economic data on Monday encouraged market players to reexamine the possibility the Fed could raise rates beyond 5 percent next month, helping the dollar.

The core personal consumption expenditures (PCE) index, the inflation gauge most closely watched by Fed policy-makers, rose an above-forecast 0.3 percent in March, the largest monthly gain since October.

It rose 2.0 percent from a year earlier, near the top of what many think is the Fed's comfort zone.

A key survey of manufacturing, the Institute for Supply Management's factory index, climbed to 57.3 last month from 55.2 in March, beating economists' forecast for a slight fall.


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