By Hideyuki Sano
TOKYO (Reuters) - The U.S. dollar was underpinned on Wednesday by remarks from the Federal Reserve chief on the need to continue with rate hikes, while the euro licked the wounds from political uncertainty following the German election at weekend.
The dollar's index against a basket of six major currencies stood at 93.07, its highest level in almost a month, having risen from 93.286 the previous day.
Fed Chair Janet Yellen said on Tuesday that the Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.
It would be "would be imprudent to keep monetary policy on hold until inflation is back to 2 percent," she said.
"Her comments suggest that latest (soft) inflation readings do not have a big bearing on the Fed's monetary policy. The Fed's focus is not to delay rate hikes too much to avoid a situation where it needs to raise rates hastily in the future," said Yukio Ishizuki, senior strategist at Daiwa Securities.
U.S. interest rate futures dipped further to price in about 70 percent chance of a rate hike by December compared to near 60 percent on Monday.
Against the yen the dollar edged up to 112.33 yen , bouncing back from Tuesday's low of 111.50. Last week's two-month high of 112.725 yen is seen as a resistance level.
The euro stood at $1.1784, having struck a five-week low of $1.17575 on Tuesday. The euro weakened against other currencies, hitting a 10-week low of 0.87545 British pound and two-week low of 1.14075 Swiss franc.
The common currency had rallied more than 10 percent against the dollar so far this year as worries about the rise of anti-establishment political forces in Europe faded while expectations rose for tapering the European Central Bank's stimulus.
Investor sentiment toward the euro was dented by the rise of a far-right party and the decline of traditional parties in Sunday's German election, which has left Chancellor Angela Merkel struggling to form a coalition government.
Tensions are rising also in Catalonia, as Spain's government said on Tuesday that police would take control of voting booths in Catalonia to help thwart the region's planned independence referendum that Madrid has declared illegal.
Still, most market players think the euro could rebound soon as investors will likely focus on how the ECB will wind back its stimulus at its policy meeting next month.
"No one really expects the European politics to become a dominant issue for the market. The euro's slide is driven by position adjustments and now may be a good time to buy," said Kazushige Kaida, head of foreign exchange at State Street in Tokyo.
Elsewhere, the Australian dollar slipped 0.3 percent to $0.7862 after having dropped to six-week low of $0.7860 on Tuesday.
The Aussie was undermined by a fall this month in the price of iron ore, its main export product.
The biggest focus for the market for Wednesday is the announcement of a tax plan by the U.S. administration and Republicans in Congress.
The plan has been developed over several months by six White House and congressional Republicans working behind closed doors. President Donald Trump told U.S. lawmakers on Tuesday he wants bipartisan cooperation on tax reform.