Dollar up vs. yen, down vs. Europe before Bernanke

NEW YORK (Reuters) - The dollar rose against the yen on Tuesday after a government report showed foreign investors bought a record amount of U.S. securities in May.

A slightly larger-than-expected advance in producer prices last month also provided mild support for the greenback and helped ease concern that the Federal Reserve will soon have to cut interest rates.

However, the dollar failed to get much traction against the euro or sterling. The latter pushed to a 26-year high at $2.0476 after UK inflation data reinforced expectations of another rate hike from the Bank of England.

The Treasury's report on capital flows showed that "the United States is attracting more than enough foreign investment to finance its trade deficit," said Michael Woolfolk, senior currency strategist at The Bank of New York.

At the same time, he said investors appeared reluctant to pare back bets against the U.S. currency ahead of Fed chief Ben Bernanke's semi-annual testimony before Congress on Wednesday.

Traders will listen closely for Bernanke's view on inflation and any comment he makes about the impact of subprime mortgage defaults on the broader housing market and economy.

Late afternoon, the dollar was nearly 0.4 percent at 122.31 yen, while the euro was up 0.1 percent at $1.3780, not far from a lifetime high of $1.3813 hit last week.

The euro was also up 0.4 percent at 168.57 yen after European Central Bank council member Nicholas Garganas said euro zone inflation risks are rising, making another interest rate increase likely.

Sterling gained 0.5 percent to $2.0461.

Net overall capital inflows into the U.S. rose to $105.9 billion in May, with corporate bond and equities purchases driving long-term investments to a record high, the Treasury department said. That was enough to cover a U.S. trade shortfall of $60 billion in May.

A 0.3 percent gain in core producer prices, stripping out food and energy costs, also sparked dollar buying against the low-yielding yen.

"The Fed focuses on core prices and we need to as well," said Kathy Lien, chief strategist at DailyFX.com in New York. "We are looking for the dollar to recover further against the Japanese yen."

Investors' focus will now turn to Bernanke's testimony as well as the release of consumer price data, also due Wednesday. Economists are expecting the core consumer price index to have climbed 0.2 percent in June, above a 0.1 percent gain in May.

Ron Simpson, director of currency research at Action Economics in Tampa, Florida, said a core CPI print of 0.2 percent or higher should prove "a decent catalyst for covering some dollar shorts."

"I think we may be near a near-term bottom for the dollar, particularly against the euro," he added. "Based on the data we've seen of late, the market may be getting a little bit ahead of itself (selling the dollar)."

(Additional reporting by Nick Olivari and Kevin Plumberg)