* Dollar bulls cautious ahead of Bernanke testimony * Euro slips after German ZEW survey, recovers quickly * Aussie rallies after central bank comments By Daniel Bases and Wanfeng Zhou NEW YORK, July 16 The dollar fell against the euro and the yen on Tuesday on expectations that Federal Reserve Chairman Ben Bernanke will reiterate in congressional testimony this week that U.S. monetary policy will remain accommodative. But losses against the euro are likely to be limited after data showing an unexpected fall in German investor sentiment in July and subdued euro zone inflation added to expectations the European Central Bank also will keep rates low to aid economic recovery. Bernanke is due to testify to Congress on Wednesday and Thursday and this could provide clarity on when the Fed will scale back its asset purchases. The dollar sold off in the second half of last week after he said highly accommodative monetary policy would be needed for the foreseeable future. "Bernanke will be a dove in his testimony and it will continue to surprise me that it is actually not fully priced in," said Sebastien Galy, foreign exchange strategist at Societe Generale in New York. The euro rose 0.70 percent to $1.3154, recovering from $1.3057 struck after the German ZEW sentiment survey. The euro's rise puts it back above its 200-day moving average at $1.3076, however resistance is seen around $1.3150, traders said. The dollar lost 0.70 percent to 99.14 yen. The dollar briefly pared its losses after data showed U.S. homebuilder confidence rose in July to its strongest level in 7-1/2 years while consumer prices rose more than expected in June. Separate data showed foreign investors sold long-dated U.S. securities for a fourth straight month in May, while U.S. industrial production rose slightly more than expected in June. Analysts said disappointing U.S. retail sales data for June, released Monday, dented expectations of an imminent reduction in stimulus by the Fed and pressured the dollar. "There is a risk that the dollar could soften a bit more," said Jane Foley, senior currency strategist at Rabobank. Some analysts said Bernanke is likely to keep alive expectations the Fed will start withdrawing the stimulus later this year, while making clear it will not tighten policy. "I have less conviction as to what he is going to say tomorrow versus what he laid out on June 19 when he unveiled the tapering time line. You would expect the chairman to deliver the same message as what the FOMC delivered, but I think officials are certainly sensitive to the volatility in the bond market," said Robert Lynch, currency strategist at HSBC in New York. In response to the prospects the Fed will reduce the size of its bond market purchases, market interest rates in the United States have spiked and spurred the rebound in the U.S. dollar. Bond yields rise when prices for the debt fall, and vice versa. The yen could face some pressure toward the weekend on expectations that Japan's upper house election on Sunday will hand Prime Minister Shinzo Abe a big victory, giving him more freedom to push forward with his agenda to revive the economy through monetary easing and implementing structural reforms. The dollar index, which measures the greenback versus a basket of currencies, shed 0.61 percent to 82.535, bringing it back below the 100-day moving average at 82.676. The index hit a three-year high of 84.753 on July 9, the day before comments from Bernanke and minutes from the Fed's latest policy meeting quashed expectations of tapering in September and caused heavy selling of the U.S. currency. The Australian dollar rose 1.47 percent to $0.9238 as market players trimmed bets on further interest rate cuts after the Reserve Bank of Australia said in the minutes of its July meeting that its current policy stance was appropriate.