Market LookBeck II

(Reuters) - The U.S. dollar fell against the euro on Tuesday after comments from Federal Reserve officials dented expectations the U.S. central bank may taper its bond purchases anytime soon.

But the dollar rose against the yen, a day before the Bank of Japan concludes a two-day policy meeting. Traders widely expect the yen to fall further on expectations Japan will continue its aggressive monetary easing.

The euro rose 0.2 percent to $1.2906, having reached a session peak of $1.2933 and moving away from a six-week low of $1.2795 touched on Friday, according to Reuters data.

Against the yen, the dollar was up 0.2 percent at 102.48 yen , coming off a session peak of 102.88 yen.

Investors scrutinized Fed comments after speculation grew that it is edging closer to tapering bond buying as the labor market improves. Focus now shifts to Fed Chairman Ben Bernanke's testimony to Congress at 10 a.m. 1400 GMT) on Wednesday.

St. Louis Federal Reserve Bank President James Bullard told an event in Frankfurt the Fed should continue quantitative easing, adjusting the pace of bond buying according to incoming data, and said U.S. inflation has recently been below target.

New York Fed President William Dudley said the economy's ability to weather lower government spending and higher taxes in the coming months will be key to the Fed's decision on whether to reduce bond purchases. Both are voting members of the Fed's policy-setting committee.

"Our view remains that Bernanke will not favor near-term 'tapering' at tomorrow's testimony and he will not support 'tapering' before he steps down as Fed Chair in January 2014," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

Analysts said if Bernanke reiterates his ultra-loose monetary policy stance, the dollar could give back some of its recent gains, but any suggestion of the Fed winding down asset purchases later this year would give a huge boost to the dollar.

"Bernanke may not be that direct and therefore I would look for implicit clues," said Paresh Upadhyaya, director of currency at Pioneer Investments in Boston. For example, if Bernanke talks about the strength of the U.S. economy or that policymakers are less concerned about the economy, markets may take that as a sign the Fed is closer to an exit, analysts said.

Also on Wednesday, the Fed will release the minutes of its April 30-May 1 policy setting meeting.

The yen had rallied from a 4-1/2-year low against the dollar on Monday after Japanese Economy Minister Akira Amari suggested the yen's strength had been largely corrected.

But on Tuesday, he said he hoped the yen settled at a level justified by fundamentals and at which the impact on imports and exports was balanced.

"It appears that Mr. Amari has been reprimanded by Japanese policy leadership, not a small coincidence considering that the Bank of Japan is meeting and will announce its latest measures, if any, tomorrow," said Christopher Vecchio, currency analyst at DailyFX in New York.

The BOJ, which began a two-day meeting on Tuesday, is expected to keep policy unchanged but could tinker with its bond-buying plan to curb a recent rise in Japanese yields.

The dollar index, which measures the dollar against a basket of other major currencies, rose 0.1 percent to 83.824, not far from Friday's peak of 84.371, its highest since July 2010.

The index has gained 5 percent so far this year on speculation the Fed may start winding down its stimulus sooner than expected.

Some analysts said any near-term dollar weakness would be temporary. The U.S. economy is growing while the euro zone is in recession and the Bank of Japan is committed to flooding the market with liquidity to boost Japanese inflation to 2 percent.

The euro reached a four-month high against the Swiss franc on Tuesday at 1.2529 francs, according to Reuters data, and was last up 0.5 percent at 1.2518 francs. The dollar rose 0.3 percent to 0.9699 franc.