FOREX-Dollar steadies ahead of Bernanke testimony

By Rika Otsuka

TOKYO, Feb 14 (Reuters) - The dollar steadied against other major currencies on Wednesday as investors looked to Federal Reserve Chairman Ben Bernanke's two-day congressional testimony for clues on the future path of U.S. interest rates.

The euro kept its firm tone after data showed on Tuesday that the euro zone economy grew by a better-than-expected 0.9 percent in the fourth quarter. The data bolstered expectations that the European Central Bank will raise interest rates to 3.75 percent from a current 3.50 percent in March, traders said.

Bernanke will deliver the Fed's twice-yearly monetary policy report on Wednesday and Thursday, with traders watching to see if he reiterates concerns about inflation that other Fed officials expressed last week.

"The market is expecting hawkish comments from Bernanke," said Mitsuru Sahara, a senior trader at the Bank of Tokyo-Mitsubishi UFJ.

"Market players will be encouraged to buy the dollar if remarks from Bernanke help make it clearer that the Fed is still watching the inflation risk," said Sahara said.

Expectations that the Fed will leave the funds rate on hold for a while will be strengthened if Bernanke highlights upside risks to economic growth and inflation, analysts said.

The Fed has kept the funds rate at 5.25 percent since August.

The dollar barely moved against the yen from late New York trade, standing at 121.15 yen JPY= after falling 0.6 percent in the previous session.

On Monday it climbed near a four-year peak of 122.20 yen struck in January as the Group of Seven richest nations failed to single out yen weakness at their meeting last weekend.

The dollar had weakened broadly on Tuesday after data showing a wider-than-expected U.S. trade deficit in December, which led economists to predict downward revisions to fourth-quarter economic growth data.

The euro was flat against the dollar at $1.3035 EUR=. The single European currency also moved little against the yen, hovering just below 158 yen EURJPY=R.

The euro steadied against the sterling at 66.95 pence EURGBP=R. The single currency climbed 0.6 percent the previous day after a steep drop in U.K. consumer prices boosted the view that the Bank of England's battle with rising prices is over.

The yen was underpinned as some investors bought back short yen positions ahead of the release of Japan's fourth quarter growth data on Thursday, traders said.

"The market could see more squaring of yen short positions as some are speculating solid GDP figures could boost expectations for a rate hike by the Bank of Japan next week," said Tsutomu Soma, a senior trader at Okasan Securities.

Economists forecast growth to have accelerated to a 3.8 percent annualised rise from 0.8 percent in the July-September period.