NEW YORK, Oct 20 (Reuters) - The dollar and the yen eased on Monday as ong
oing action to rescue the global banking system cooled extreme risk aversion, but losses were capped amid skepticism about stock market gains being sustained.
Analysts said there was a reluctance to aggressively sell the two currencies, which have benefited from the credit turmoil, ahead of Federal Reserve Chairman Ben Bernanke's testimony at a House of Representatives Budget Committee hearing.
Continuing efforts to bail out banks around the world, including the Dutch government's cash injection into ING and South Korea's pledge to pump funds into its financial system, pushed interbank dollar lending rates lower and helped to quell some of the panic that has gripped markets since September.
Stocks on Wall Street were poised to open higher after a rise in European shares, which in turn took a cue from stronger Asian stocks as investors chose not to focus on a looming global recession. Recovering stock markets also damped the rush for dollars.
'The critical thing is the market wants to hear Bernanke say the worst is behind us and that's why there is pre-selling ahead of that, everybody is very skeptical because he tends to be very dour whenever he testifies,' Boris Schlossberg, director for research at GFT Forex in New York.
'That tends to have a very negative impact on equities and that's why you are not seeing the high yielders really rallying as they did earlier in the session because a lot of the enthusiasm has disappeared already.'
Bernanke's testimony is scheduled to start at 10 a.m. (1400 GMT).
In New York morning trade, the euro was up 0.1 percent at $1.3422, after hitting a session high of $1.3530 earlier in the day.
The dollar also fell against the British pound, slipping 0.5 percent to $1.7378, while higher-yielding currencies like the Australian and New Zealand dollars posted strong gains.
Against the Japanese yen, the dollar was flat at 101.63 yen 'Definitely there is a sense now that the situation is not as panicky as it was before,' said Sonja Marten, FX strategist at DZ Bank in Frankfurt.
'I'm not quite sure whether to believe we have seen the worst, but everyone is hoping that might be the case.'
Bearing out market scepticism, shares remained vulnerable to a pile-up of data showing weakening economies, analysts said, pointing out weaker-than-expected growth in China, whose stunning expansion has been seen as an anchor in the global economy [ID:nPEK312415].
Separately, the German government approved a set of strict conditions for banks that make use of a 500 billion euro rescue package, including limits on executive salaries [ID:nLJ241789].
Despite the dollar's slide on Monday, analysts say that demand for the world's most liquid currency, as well as the low-yield, low-risk yen, could return quickly as financial markets remain fragile as economies teeter on the verge of recession.
Some investors were concerned about the impact of deteriorating financial conditions in emerging markets highlighted by Iceland, Ukraine and Pakistan, which had sought aid to prop up their economies
(Additional reporting by Veronica Brown in London; Editing by Chizu Nomiyama) Keywords: MARKETS FOREX
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