* Dollar testing support at 99.56 yen in technical trade
* Drop in Portuguese yields aids euro
By Wayne Cole
SYDNEY, July 23 (Reuters) - The dollar was nursing broad losses in Asia on Tuesday as soft U.S. housing data offered an excuse to sell, while a sharp fall in Portuguese bond yields provided a boost to the euro.
Dealers said liquidity had dried up amid the northern summer and activity had been characterised by a general trimming in short positions of everything from the Australian dollar to the yen and gold.
"We've hit the summer lull and volatility has dropped right off," said a trader at an Australian bank. "The longer-term outlook is still for dollar strength given the Fed is much closer to tapering than any other major, but for now people are just trading on technicals."
As a result, the dollar was testing chart support at 99.56 yen and a break there would see a move to the next bulwark at the July low of 99.28.
The euro was up at $1.3186, after touching a one-month high of $1.3218, while the dollar index fell 0.5 percent to 82.220.
The single currency won a reprieve from political worries after Portuguese President Anibal Cavaco Silva said the current government will stay in office to keep an international bailout on track. That saw a sharp narrowing in Portuguese bond spreads over bunds.
The dollar was not helped by a surprising 1.2 percent fall in U.S. existing home sales in June, though they were still up over 15 percent on the same month last year.
While the Federal Reserve is still expected to start tapering its asset buying before year end, a recent run of mixed data has lessened the urgency for a shift and pulled Treasury yields off their highs.
"The dollar has been moving in lock step with yields and to get the uptrend going again it will likely need 10-year yields to break above the July peak of 2.755 percent," said the trader at a local bank. "But that's a big level. It'll be tough to clear."
That was one reason the Australian dollar had managed to recoup a little ground to reach $0.9251, though it faces stiff resistance in the $0.9292 to $0.9306 area.
It will also be tested by Australian inflation data due on Wednesday where a low result will only fuel speculation of an August rate cut from the Reserve Bank of Australia.
There is little in the way of major economic data due in Asia on Tuesday with the next big release being the HSBC flash PMI for China out on Wednesday.