(Updates with late New York prices)
* Dollar gains ground against euro
* U.S. housing and durable goods reports encourage dollar bulls
* Draghi reinforces expectations of ECB easing next week
By Daniel Bases
NEW YORK, May 27 The euro softened slightly against the dollar and the yen on Tuesday after unexpectedly strong U.S. economic data and uncertainty persisted over possible European Central Bank monetary policy action next month.
The euro steadily lost ground on the greenback as investors in the United States and Britain returned from long holiday weekends and encountered stronger-than-expected U.S. durable goods data that was tempered by revisions to past reports.
Housing price data in the U.S. rose, but underlying strength was viewed as mixed as prices are rising more slowly on a year-over-year basis, according to the S&P/Case-Shiller Home Prices Indices report.
ECB President Mario Draghi, speaking in Portugal, said the bank was aware of risks from prices remaining too low for too long but that the bank had the tools to get inflation back to its 2 percent target.
"We have a pretty good idea that some sort of action in June is likely, if those inflation forecasts are revised lower, which it looks likely they will be. But they haven't given us the indication of what type of action they will take," said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut.
The euro zone issues its May flash inflation data on June 3 with the Reuters consensus estimate of economists forecasting a 0.7 percent year-on-year increase. The ECB's governing council meets on June 5.
In late afternoon New York trade, the euro fell 0.08 percent to $1.3634 after briefly touching a fresh three-month low of $1.3613. Analysts at BNP Paribas see the euro now trading cheap following its sell-off, putting a fair value level at $1.3790.
Against the yen, the euro softened 0.02 percent to 139.05 yen.
The dollar index gyrated in and out of positive territory. It was down 0.05 percent against a basket of currencies in late trade.
"It looks like the dollar is better bid for choice as there really is not a lot going on other than commercial interests. It is also getting on to the end of the month and American corporates are doing some buying," said Lane Newman, director of foreign exchange for ING Capital Markets in New York.
"For the ECB, I think anything less than a 10 basis point cut will be seen as a disappointment. Generally speaking I do not favor the euro," Newman said.
(Editing by James Dalgleish)