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By Ola Galal
LONDON, July 19 (Reuters) - The dollar eased slightly against most currencies on Thursday over concerns about the health of U.S housing market as investors eye the next Federal Reserve rate move.
The dollar reached its lowest levels in years on Wednesday following a speech by Federal Reserve Chairman Ben Bernanke outlining risks in the housing market that could weigh on U.S. economic growth.
Bernanke is due to start a second day's testimony to Congress at 1330 GMT. Analysts expect his speech will reiterate what he said on Wednesday, including concerns that inflation remains the Fed's main concern.
Investors will therefore pay close attention to the question and answer session for fresh clues on Fed thinking on the economy, inflation, housing market and risks. Bear Stearns said on Tuesday two of its hedge funds exposed to the risky subprime sector were now virtually worthless.
"Up until a few days ago, the market assigned a very small probability to the Feds being forced to cut rates this year, but now that probably has been increased," Kevin Grice, analyst at American Express Bank, said. "At the end of the day, I don't think the Fed will cut rates, but in the next few weeks, the market is going to think that (they will cut)."
The dollar's losses were limited, however, as fears other banks were about to report similar difficulties to Bear Stearns proved unfounded and Asian and European equity markets bounced back sharply.
At 1151 GMT, the euro was slightly up on the day at $1.3816, having hit $1.3833 on Wednesday, its strongest level since its launch in 1999 <EUR=>.
Sterling was down 0.2 percent at $2.0478 <GBP=> after softer than expected UK retail sales data, coming further off a 26-year peak of $2.0548 hit on Wednesday.
The dollar was up 0.1 percent at 122.06 yen <JPY=>but the dollar index, a measure of its value against a basket of six major currencies, was slightly down at 80.392 (.DXY: Quote, Profile, Research).
The index fell to a 12-year low of 80.227 on Wednesday.
U.S. DATA IN FOCUS
Earlier on Thursday, data showed that UK retail sales for June grew 0.2 percent on the month and 3.4 percent on the year, slowing from the previous month's rate of increase and below analysts' expectations.
Later in the day, investors will be eyeing U.S. jobless claims, which are due for release at 1230 GMT. Economists in a Reuters survey forecast a median total of 311,000 new filings compared with 308,000 in the previous week.
The Philadelphia Federal Reserve Bank will also release its business activity index for July at 1600 GMT and the Fed publishes minutes from its June 27-28 policy meeting, where it kept key interest rates unchanged at 5.25 percent.
The market sentiment that U.S. rates would have to stay in hold or be cut comes as analysts expect the Bank of England and the European Central Bank to raise rates in September. Such moves are seen supporting the pound and the euro.
"The FX market has warmed to the idea that the Fed's going to be on hold for the rest of the year so it will have to look elsewhere for direction, probably other asset classes. The dollar's movements are very much dependent on how the U.S. corporate bond market trades, at least for the time being," said Paul Mackel, senior currency strategist at HSBC.
Riskier asset classes like corporate bonds, equities and emerging markets were steady to firmer on Thursday, while government bonds were weaker.
Meanwhile, currency markets have so far shown little reaction to data from Beijing earlier on Thursday that showed China's economy in the second quarter grew at a sizzling 11.9 percent, the fastest pace of growth in 11 years.
This, together with a 4.4 percent rise in consumer prices last month from a year ago, will likely increase investors' bets Chinese monetary policy will be tightened in some way soon.