* Expectations of loose Fed policy weigh on dollar
* Japan PM Abe’s election win to see dollar/yen trade higher
* Euro zone PMIs on Wednesday are main focus for the euro
NEW YORK, July 23 (Reuters) - The dollar traded lower against the euro and pared gains against the yen in thin volume on Tuesday as investors adjusted positions for technical levels in the absence of any economic data to drive direction.
The dollar earlier moved off a one-month low against a basket of currencies as investors bet that the currency recently had declined too far, too fast despite the debate about when the Federal Reserve would begin to slow its stimulus measures.
But as trading in London wound down and New York failed to pick up volume with skeleton staff at many trading desks during the peak summer vacation period, the dollar failed to follow through on those gains.
The euro rose to its highest level since June 21, as some investors pushed it to the 50 percent Fibonacci retracement of the move from the early April low to the mid-June high.
Trading “is more of a technical move in an otherwise very thin market amid generally soft data and questions on the timing of tapering,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The euro was 0.2 percent higher at $1.3216 with the session peak at $1.3230.
Fed Chairman Ben Bernanke’s dovish remarks have emphasized that the U.S. central bank’s bond buying will continue in some form and interest rates are likely to remain low for the foreseeable future.
Benchmark yields have fallen as other top Fed officials have stressed that the timing of any reduction in the central bank’s $85 billion monthly asset purchases would depend on economic data.
As a result, along with some weaker-than-expected U.S. data, the dollar has sold off to key support levels. Further downside will require another round of bad data, analysts said.
“After reactions and over-reactions, global markets seem now to have learned that tapering does not mean hikes,” said Jose Wynne, head of FX research at Barclays in New York. “This looks about right. Hence, we expect participants to look into fundamentals to learn about future directions.”
The dollar index was last down 0.2 percent at 82.088, also its weakest since June 21.
Analysts, however, said the dollar would likely strengthen in the coming months against currencies such as the euro, sterling and the yen because the Fed is expected to be the first major central bank to make its policy less accommodative.
But few anticipate the dollar’s rise to be smooth.
Benchmark U.S. 10-year Treasury yields, which have had a robust correlation with the dollar index, have slipped in recent weeks. They last stood at 2.5049 percent, slightly up on the day but well below the 2.755 percent hit on July 8, their highest since August 2011.
“Ten-year U.S. Treasury rates have stabilized in a range that is broadly consistent with a more normal risk premia,” Wynne said.
The dollar was up 0.1 percent at 99.78 yen, recovering from a one-week low of 99.13 yen earlier.
Analysts said Japanese Prime Minister Shinzo Abe’s decisive upper house election win last weekend would pave the way for pro-growth fiscal policies and for further Bank of Japan monetary easing, which would weaken the yen.
The dollar is up more than 15 percent versus the yen this year, and the recent slide in dollar/yen has likely bottomed out, according to trends in the options market.
Investors are looking to flash Purchasing Managers’ Index data on Wednesday as worries about euro zone economies are re-emerging. Analysts said there would probably be selling into any rebounds in the euro.
Analysts said the onset of holidays has reduced volumes and volatility, which could result in most currencies trading in ranges.
Some $3.8 billion in euros had changed hands, according to Reuters Dealing data on Tuesday, and $1.97 billion in yen.