(Corrects spelling of name in 14th paragraph)
* Dollar index edges down 0.1 percent
* Focus on Powell's testimony due later on Tuesday
* U.S. economic indicators this week also seen as key
* Traders brace for German, Italian political developments
By Masayuki Kitano and Tomo Uetake
SINGAPORE/TOKYO, Feb 27 (Reuters) - The dollar eased onTuesday as investors awaited a slew of economic data this weekand Federal Reserve Chairman Jerome Powell's testimony, whichcould determine whether the U.S. currency's recovery from athree-year low has more room to run.
The dollar's index against a basket of six major currencies fell 0.1 percent to 89.728 .DXY . The greenback, however, isstill 1.7 percent above a three-year trough near 88.25 set onFeb. 16.
The focus this week is Powell's first congressionaltestimony, at a time when investors are nervous over the pace ofU.S. monetary tightening as it unwinds years of stimulus.
Powell will testify on the central bank's semi-annual reporton monetary policy and the economy on Tuesday, before the U.S.House of Representatives' Financial Services Committee. will probably sound optimistic on the economicoutlook, but stress patience in assessing whether inflation willhead higher, said Roy Teo, investment strategist for LGT Bank inSingapore.
"The dollar is unlikely to get a major lift after Powell'sspeech," Teo said.
Teo added that this is especially the case given theprevailing market expectations for the Fed's preferred inflationmeasure, the core personal consumption expenditures (PCE) priceindex, due on Thursday.
Economists polled by Reuters expect the core PCE to increase1.5 percent year-on-year in January, which would be the same asDecember's pace and still some way off from the Fed's 2 percenttarget.
If that turns out to be the case, the hurdle for the Fed toupgrade its projections for the number of interest rate hikesthis year at its policy meeting in March will be relativelyhigh, LGT Bank's Teo said.
This week is crammed with U.S. economic data on consumerconfidence, revised fourth-quarter growth, manufacturing andpersonal income and spending.
Against the yen, the dollar was little changed at 106.95 yen JPY= , and was 1.2 percent above a 15-month low of 105.545 yenset on Feb. 16.
The euro edged up 0.2 percent to $1.2339 EUR= , withinvestors seen cautious about taking big positions this weekahead of political events in Europe.
Italians vote in a national election on Sunday, while theleading political parties in Germany will decide on a coalitiondeal that could secure Angela Merkel a fourth term aschancellor. is clear that the risk of something happening is stillthere. In particular, should the centre right win the electionthen the battle over who will be prime minister and choose themember of the government will be key," said Simon Derrick, chiefcurrency strategist at BNY Mellon, referring to the Italianelection.
"Also interesting to note is how muted the market responseto the election has so far been. The only sign that the markethas begun to take note has been the slight widening seen in thekey Italy/Germany spreads. Perhaps the market isn't payingenough attention to the risks here," he added.
The bond yield spread between the two countries IT10YT=TWEB DE10YT=TWEB stood at 145 basis points (bps), upfrom its 1 1/2-year low around 125 bps touched earlier thismonth but way below last year's peak above 210 bps.
Euro zone inflation data due later this week further addedto a nervous outlook for euro trading.
On Monday, European Central Bank President Mario Draghispoke before the European Parliament and struck an optimistictone about the euro zone economy. He said, however, thatinflation has yet to show more convincing signs of a sustainedupward adjustment.