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NEW YORK (Reuters) - The dollar rose against the euro on Thursday after Federal Reserve Chairman Ben Bernanke said the U.S. central bank was ready to shield the economy, but offered few hints that further monetary stimulus was imminent.
The euro earlier had hit its highest level since May after China's central bank cut benchmark interest rates to support growth in the world's second-largest economy.
The U.S. dollar had been hindered by expectations that the Federal Reserve would take further steps to ease monetary policy, but those expectations were countered by Bernanke's almost sanguine tone, which indicated the Fed was far from crisis mode.
"I don't think he is definitely saying that QE3 is on the way," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "He's saying what he has said before, reassuring people that they will act if things deteriorate further. In other words, they are there if needed, but they don't feel they are needed yet."
The euro was last at $1.2557, down 0.1 percent from the prior close.
"Despite economic difficulties in Europe, the demand for U.S. exports has held up well," Bernanke told Congress.
Earlier the euro climbed as high as $1.2625, using Reuters data, its highest level since May 23. Traders had earlier cited resistance around $1.2625.
Against the yen, the euro also hit its highest level since May 23, at 100.61 yen, before paring gains to trade at 99.94 yen, up 0.4 percent.
Before Bernanke began his testimony to Congress, trading had been influenced by China's twin surprises on interest rates, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set deposit rates.
"Rate cuts in China serve to reduce China's exposure to global weakness," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "Rate cuts in combination with a stimulus program - still to be announced, should shelter Asia somewhat from global weakness and should help keep a bid to Asian growth and currencies."
Decent demand at a Spanish bond auction and expectations that European policymakers may take further steps to support the global economy also led to demand for perceived riskier currencies such as the Australian dollar, which rose to a three-week high.
The global economy has floundered in recent weeks. Risks to growth have mounted on concerns about a possible Greek exit from the euro zone and the fragility of the Spanish banking system, putting pressure on euro zone politicians and global central banks to come up with a credible policy response.
Speculation that Spain could become the fourth euro zone country to need an international bailout prompted investors to sell the euro heavily last week, although European sources have said Germany and European Union officials are urgently exploring ways to support Spain's country's stricken banks.
Many market players were already expecting euro gains to be limited. A Reuters poll suggested the euro was unlikely to recoup recent steep losses against the dollar in the next 12 months.
"The euro can bounce up to $1.2630, but then it will be a sell on rallies as Europe's problems are ... considerable," said Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Partners in London.
The dollar managed to outperform the yen, which was hit broadly as risk appetite improved. Demand for the yen was also dampened by recent threats from Japanese authorities to curb its strength.
The dollar was 0.5 percent higher at 79.56 yen after posting a session peak of 79.78, also the highest since May 23 using Reuters data, and well off a 3-1/2-month trough set last Friday.
The dollar was also bolstered against the yen by a report showing the number of Americans lining up for new jobless benefits fell last week for the first time since April, a reminder that the wounded labor market is slowly healing.
"The number was very close to expectations," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. "We've had a deterioration in the last few months, and now it looks like claims are plateauing."
Reporting By Nick Olivari; Additional reporting by Steven C. Johnson and Gertrude Chavez-Dreyfuss in; Editing by Leslie Adler