By James Ramage

The dollar eased against the euro and the yen on Tuesday as traders digested comments made by Federal Reserve Chairwoman Janet Yellen during her first day of testimony to Congress.

The dollar had initially ticked higher against rivals as Ms. Yellen appeared to signal that the improving economy would lead to higher interest rates around midyear. However, investors sold dollars after she also mentioned risks to the U.S. economy that could delay the central bank’s first rate increase since 2006.

The euro edged 0.1% higher to $1.1345 in late-afternoon trade. The dollar rose 0.1% against the Japanese currency to 118.88 yen, surrendering most of the gains made before the testimony.

Ms. Yellen struck a mostly balanced message in her semiannual testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs. She cited an improving labor market, in which long-term unemployment has fallen substantially and there are fewer involuntary part-time workers.

But she also said workforce participation and wage growth remain below optimal levels, and inflation will continue to undershoot the Fed’s 2% target on the back of lower oil prices.

Ms. Yellen’s testimony was not a strong signal to buy the dollar right now, said Joe Manimbo, senior market analyst at Western Union. This uncertainty continues to drag along for the outlook for Fed policy, and that’s what will cap any of the dollar’s gains.

Ms. Yellen said the Fed’s patient stance means it won’t raise rates for at least the next couple of meetings. However, Ms. Yellen also said removing the term patient in a Fed policy meeting wouldn’t mean an automatic rate rise two meetings later. That remark likely pushed back market expectations for a midyear rate increase, said Mark McCormick, a currency strategist at Credit Agricole.

Inflation is likely to move lower in the short term rather than higher, so that means it’s unlikely the Fed will move to raise rates around midyear, Mr. McCormick said.

Fed-funds futures, which investors use to bet on central-bank policy, showed late Tuesday afternoon that investors predict a 31% likelihood of a rate increase at the July policy meeting, according to data from CME Group Inc. The number was down from 37% before Ms. Yellen’s testimony and from 48% two weeks ago.

Higher U.S. rates would make the dollar more attractive to investors, as it would increase returns on assets denominated in the currency. Investors have piled into the dollar and U.S. assets in anticipation of higher borrowing costs and tighter Fed monetary policy overall, at a time when rival central banks have been easing policy to combat low growth and inflation.

Ms. Yellen continues her testimony on Capitol Hill on Wednesday, when she meets with the U.S. House of Representatives Committee of Financial Services. The Fed will hold its next policy meeting on March 17-18.

Write to James Ramage at james.ramage@wsj.com

(END) Dow Jones Newswires

February 24, 2015 16:27 ET (21:27 GMT)