By Tom Finn
LONDON (Reuters) - The dollar edged down on Tuesday ahead of congressional testimony by Federal Reserve Chairman Jerome Powell which traders will scrutinize for clues on the pace of U.S. interest rate rises and risks emanating from trade conflicts.
Powell will testify on the economy and monetary policy before the U.S. Senate Banking Committee at 1400 GMT on Tuesday.
He is expected to deliver an upbeat message on the outlook for growth and reaffirm the Fed's gradual monetary tightening policy but could face tough questions on the central bank's independence and how it would deal with an escalation in the global trade war.
"The escalating trade conflict is becoming an increasingly realistic downside risk that could weigh on sentiment and capital spending," said Societe Generale (PA:SOGN) analyst Guy Stear.
"It is questionable how much longer the top central banker will be able to and will want to remain so reserved in view of increasing tensions."
At 0745 GMT the dollar traded down 0.2 percent at 94.37 (DXY) against a basket of six major currencies, paring small gains booked during early morning trade.
The U.S. currency traded flat against the yen to 112.27 yen
The dollar's gains have this year been capped by worries over the intensifying trade dispute between the United States and China, although the concerns have not derailed the greenback's solid performance so far.
The International Monetary Fund had warned on Monday that escalating and sustained trade conflicts following U.S. tariff action threaten to derail economic recovery and depress medium-term growth prospects.
Analysts are uncertain how the Fed would react if the conflict over trade with China deteriorates: either with aggressive rate hikes due to the inflationary effect of the import tariffs or with a pause in the hiking cycle due to growth dampening.
"[If the trade war worsens] I would expect that the U.S. dollar would initially appreciate as the result of a flight into safe havens, with it probably benefiting even more in case of aggressive rate hikes," said Thu Lan Nguyen, an FX strategist at Commerzbank AG (DE:CBKG) in Frankfurt.
Other major currency pairs on Tuesday stuck to tight ranges.
The euro (EUR=EBS) and British pound
The Australian dollar
The New Zealand dollar