FOREX-Dollar weakens as Yellen indicates no rush to raise rates

* Yellen refrains from giving clear hint on rate hike timing

* Dollar bulls disappointed, greenback lower vs yen and euro

* Fed still seen taking a step to normalising policy (Adds comments, details)

By Anirban Nag

LONDON, Feb 25 (Reuters) – The dollar fell against a basket of currencies on Wednesday after Federal Reserve Chair Janet Yellen suggested the central bank would not be rushed into kicking off the U.S. interest rate tightening cycle.

The drop in the dollar mirrored a pullback in U.S. front-end yields and came as some investors who positioned for a more definitive signal on when interest rates would start to rise were left disappointed by Yellen’s testimony.

Yellen declined to provide much insight into when the word “patient” might be dropped from the Fed’s monetary policy statement and instead emphasized that dropping the word would not necessarily mean that rate hikes were imminent.

Instead, a decision to raise rates would be evaluated on a meeting-to-meeting and would be very much data-dependent.

“Some investors were positioned for more hawkish comments and they were disappointed,” said Yujiro Goto, currency strategist at Nomura. “We still hold a dollar bullish bias and if the U.S. jobs data surprises to the upside next week, we could see a return of dollar strength.”

The dollar index was down 0.2 percent at 94.292, with the greenback shedding ground against almost every major currency. It fell 0.2 percent against the yen to 118.73 yen , while the euro was up 0.3 percent at $ 1.1375. Sterling too, was up by a similar margin at $ 1.5502.

The dollar’s drop was seen as temporary as the Fed is still on track to raise rates later this year, perhaps in September and not in June as some major banks had forecast.

That is in contrast to the European Central Bank which embarks on a 60-billion-euros-a-month-bond buying programme from next month while the Bank of Japan is already deep into its quantitative easing programme. All of which makes the dollar a buy on dips, traders said.

“Yellen’s latest statements were taken as dovish more or less. But the removal of the word ‘patient’ at the March meeting now looks certain, and that would provide an opportunity to buy the dollar again,” said Daisuke Karakama, market economist at Mizuho Bank in Tokyo.

The Australian dollar rose 0.6 percent to $ 0.7878, aided by the greenback’s broad weakness and a survey showing that activity in China’s mammoth factory sector edged up to a four-month high in February.

The Australian dollar is often seen as a liquid proxy of Chinese growth prospects due to Australia’s large trade exposure to China.

(Additional reporting by Masayuki Kitano; Editing by Tom Heneghan)