NEW YORK (Reuters) - The dollar rose on Thursday, recovering from losses the previous day, as Federal Reserve Chair nominee Janet Yellen provided no negative surprises as expected, defending the U.S. central bank's stimulus to spur growth.
That prompted investors to cash in even further on short positions on the dollar made after Yellen's prepared remarks were released on Wednesday, leading to a rebound in the greenback. Yellen spoke on Thursday at her confirmation hearing before the Senate Banking Committee.
The dollar had already recovered against the euro and yen prior to Yellen's question-and-answer session, mostly due to weak euro zone data and the prospects of currency intervention by the Bank of Japan to keep the yen lower.
In her Q&A, Yellen made it clear that she would press forward with the Fed's ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.
The reaction in the FX market to Yellen's comments was generally muted.
"It looks as if FX investors at least are not completely convinced that the Fed will be able to follow through on its dovish inclinations," said Steven Englander, global head of G10 FX strategy at CitiFX in New York.
"We think the U.S. economy needs quantitative easing less than the euro zone and Japan ... So there is a small case for the dollar within G3 even if tapering is in the slow lane and a big case if it turns out that data and asset market conditions force the Fed to slow the pace of buying."
The dollar rose to two-month highs against the yen at 100.14, after Japanese Finance Minister Taro Aso told a parliamentary committee that Japan must retain currency intervention as a policy tool and be ready to take action when markets are excessively volatile.
The low-yielding yen further extended losses after Yellen's testimony. It last traded up 0.8 percent at 99.96 yen.
But for some market participants, the dollar's short-term prognosis remained weak given the underlying softness in the U.S. economy that should prevent the Fed from scaling back its bond purchases for now.
"There's not a whole lot of positives for the dollar right now," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "I don't think it's going to fall out of bed, but I think it's going to be sold into modest rallies."
EURO ZONE DATA
The euro, meanwhile, fell against the dollar. The unit was earlier pressured by European data showing the euro zone just emerged from recession in the third quarter with growth of 0.1 percent, dragged down by a contraction in France.
In late afternoon trading, the euro was down 0.2 percent at $1.3462 after climbing to a five-day peak of $1.3497 earlier in the global trading day. It retraced some losses from the session low of $1.3417 as Yellen spoke.
"The growth outlook for the U.S. and euro zone is beginning to diverge, with the third-quarter prints suggesting there is too little optimism priced in for the U.S. and too much for Europe," said Camilla Sutton, chief FX strategist at Scotiabank in Toronto.
"This is an important shift and one that is likely to support the U.S. dollar," she added.
The euro is likely to stay above a low of $1.3295 touched after the European Central Bank cut interest rates last week, unless the central bank opts for more easing measures, said Lena Komileva, managing director at G+ Economics in London.
"The euro will defy gravity until the ECB builds new momentum for liquidity easing," she said.
ECB Executive Board member Peter Praet on Wednesday raised the prospect of the central bank adopting negative interest rates or buying assets from banks.
Sterling's downside, meanwhile, was limited after Bank of England Governor Mark Carney on Wednesday gave an upbeat assessment of the UK economy, leaving open the possibility UK interest rates will rise earlier than previously thought.
The pound last traded up 0.3 percent at $1.6065 despite weak UK retail sales data.
(Additional reporting by Nick Olivari)