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By Tom Westbrook

SINGAPORE (Reuters) – The dollar paused for breath on Tuesday as traders looked to testimony from U.S. Federal Reserve chair Jerome Powell for guidance, after a surprise shift in the central bank’s policy outlook, while cyptocurrencies nursed heavy losses.

The greenback has gained sharply since the Fed last week flagged sooner-than-expected interest rate hikes, but dipped on Monday to hand back a little bit of that rise.

Against the euro, the dollar nursed an overnight loss of about 0.4% to steady around $1.1909. It held at 110.31 yen, and the dollar index was steady at 91.915 after a loss of about 0.5% on Monday.

The Australian and New Zealand dollars eased – after snapping losing streaks on Monday – with the Aussie down 0.2% to $0.7527 and the kiwi down 0.15% to $0.6978.

“We’ve had a meaningful shift (at the Fed) from a longtime dovish stance to now a slightly hawkish one,” said Westpac currency analyst Imre Speizer.

“We’ve had a bit of a positioning cleanout – the whole world was mega short the U.S. dollar, and that’s in good part probably been cleaned out already – and now we take a wee breath before the next move up,” he said.

Over the next few weeks the Aussie dollar could drop to around 74 cents and the kiwi to around 68 cents, he said, before they both might recover as the U.S. dollar charts a “raggedy” rise on the back of a strong U.S. pandemic recovery. [AUD/]

In the medium term, investors will be keenly focused on the U.S. labour market as its performance is likely to have an influence on the Fed’s attitude. In the nearer future, all eyes are on Powell who appears before Congress from 1800 GMT.

In prepared remarks he noted sustained labour market improvement and the recent increase in inflation.

On Monday hawkish Fed officials such as St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan offered toned-down rhetoric.

New York Fed President John Williams said it was too soon to shift policy, and that he expects inflation to ease from about 3% this year to close to 2% in 2022 and 2023 – which is something markets are not so sure about.

“The Fed is nearly always late on such things,” said RBC Capital Markets’ chief economist Tom Porcelli, who thinks core inflation could be higher – just under 3% – by the end of 2022.

“That is not 2% inflation,” he said in a note, and it is going to eventually apply pressure to the Fed to move on rates.

“In the meantime, we have no doubt with that 2% forecast as cover, Powell will attempt to play down the likelihood of a rate hike next year. But just as he eventually relented on taper talk, he will relent on dismissing talk about hiking rates too. Just give it more time.”

Elsewhere on Tuesday sterling steadied at $1.3917, holding on to its overnight bounce as investors look forward to the British economy reopening further on July 19.

Bitcoin and other cryptocurrencies had slumped on Monday as a tightening crackdown on trading and mining in China, as well as technical factors, whacked the asset class.

Bitcoin lost more than 11% on Monday and rival ether fell more than 15% as both suffered their sharpest selloff in about a month. On Tuesday they held above May lows, with bitcoin at $31,535, but the mood did not improve.

“The tides of FONGO (Fear of Not Getting Out) are creeping in,” said Chris Weston, head of research at broker Pepperstone.

“Bitcoin is also at a make or break point,” he said, as it tests May’s trough near $30,000.

“Ethereum looks plain ugly and if crypto is an emotive asset, then one would have to be the staunchest of HODLers to be holding this and not look for some sort of hedge,” he added, using cryto-market slang for bullish investors.

(Reporting by Tom Westbrook; editing by Richard Pullin)