By Kate Duguid

NEW YORK (Reuters) – The dollar was modestly higher on Tuesday afternoon after U.S. Federal Reserve chair Jerome Powell pushed back on suggestions that loose monetary policy risked unleashing inflation, while the British pound rose to fresh three-year highs.

The growing likelihood that Congress will pass President Joe Biden’s $1.9 trillion stimulus plan has stoked fears about a possible spike in inflation. As those expectations have risen, so has the popularity of the so-called reflation trade, which this month has pulled the dollar lower.

But in testimony before the U.S. Senate Banking Committee, Powell said the central bank would keep its policies in place as it focused attention on getting Americans back to work.

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” said Powell.

Powell in 2020 said the central bank would be willing to allow inflation to run higher than its target rate for periods of time in order to average 2%.

While Powell did not allay the inflation fears, the central bank’s overall support for the economy may have kept the dollar afloat on Tuesday.

“For the dollar, the jury remains out with regards to which direction the next major move will be, though for now, inflation concerns may be offset by hopes for a quicker U.S. economic recovery, as vaccine distribution is expected to ramp up in the coming weeks,” said Ronald Simpson, managing director, global currency analysis for Action Economics.

The dollar index was last at 90.141, 0.11% higher on the day but off session highs after the post-Powell dip.

Sterling hit a nearly three-year high of $1.411 on Tuesday morning, last up 0.33% on the day, as investors stuck with their bets that a rapid rollout of the COVID-19 vaccine would allow the British economy to reopen over the next few months.

Prime Minister Boris Johnson on Monday laid out a step-by-step plan for ending the current British lockdown.

Sterling has also benefited in recent months from relief over Brexit and better-than-expected economic data, the latter of which has diminished the chances the Bank of England would push interest rates below zero, said John Doyle, vice president of dealing and trading at Tempus Inc.

Elsewhere, the euro weakened 0.07% to $1.215 and the Japanese yen, the worst performing major currency of 2021, was down 0.20% on the day to 105.27 yen per dollar.

(Reporting by Kate Duguid in New York and Tommy Wilkes in London; Editing by Steve Orlofsky and Sonya Hepinstall)