By Brigid Riley

TOKYO The dollar softened against a basket of currencies on Tuesday, mirroring a dip in Treasuries yields as investors awaited key U.S. economic data before the Federal Reserve's monetary policy meeting next week.

Bitcoin charged back into the market spotlight with the virtual currency soaring on speculation that the United States could soon approve a bitcoin exchange-traded fund.

The dollar index last sat around 105.47, having lost over 0.5% in the previous session and slipped to its lowest in about a month as U.S. Treasury yields tumbled.

The greenback found support last week after Fed Chair Jerome Powell said U.S. economic strength might warrant tighter financial conditions, which pushed the benchmark 10-year yield above 5% to its highest since July 2007.

The large swing in yields comes as global uncertainty and growing geopolitical risks have markets on edge, with tensions high in the Middle East since Hamas' Oct. 7 attack on southern Israel.

Market attention next turns to some of the last bits of U.S. economic data before the Fed's meeting on Oct. 31 - Nov. 1, with the flash purchasing managers' index (PMI) out on Tuesday, and gross domestic product as well as another inflation report due later in the week.

The PMI data could set the market expectations ahead of the GDP report, said Matt Simpson, senior market analyst at City Index.

"If the data leans far enough one way it could prompt a strong dollar rally or breakdown with the Fed in a blackout period," he said, referring to the period before the policy meeting in which limits are placed on public communications from central bank officials.

The Fed is expected to hold rates at its meeting next week.

The European Central Bank is also set to leave interest rates untouched at its meeting on Thursday, after raising its key interest rates 25 basis points in September.

The euro extended gains after hitting a one month- high versus the greenback on Monday, perched around $1.0682.

Meanwhile, the dollar's retreat gave the battered yen some slight relief, with the Japanese currency hovering near 149.65 after hitting the sensitive 150-level both on Friday and Monday.

Traders see the 150 threshold as a possible line-in-the-sand for Japanese authorities to intervene in the currency market.

However, the data out of the United States this week could have the yen inching back into the danger zone if it comes in strong.

"The yen will be particularly sensitive to hot U.S. data, especially if it causes Treasuries to blow through what's looking like a key resistance level of 5% or so," said Kyle Rodda, senior financial market analyst at Capital.com.

Markets will also be watching out for the Bank of Japan's policy decision on Oct. 31. The surge in global interest rates has generated discussion about a potential tweak to the bank's bond yield control policy.

A survey on Tuesday showed Japan's factory activity shrank for a fifth straight month in October while the service sector saw its weakest growth this year.

In cryptocurrency markets, bitcoin continued to rise in Asian trading hours to touch $35,198, its highest since May 2022, on speculation that an exchange-traded bitcoin fund is imminent.

(Reporting by Brigid Riley. Editing by Sam Holmes & Shri Navaratnam)