* Dollar down against yen, sterling, Aussie
* Euro off lows after EU elections
* Draghi reinforces expectations of ECB easing next week
* Large batch of U.S. data may set tone
By Patrick Graham
LONDON, May 27 (Reuters) - The dollar fell 0.2 percent against a basket of currencies on Tuesday, extending weakness since the end of last week after another retreat in U.S. bond yields.
A stronger dollar was one of many investment houses' major bets at the start of this year but the U.S. economy has so far failed to deliver the comprehensive pickup that would convince the Federal Reserve it needs to raise dollar returns next year.
London-based analysts and traders said another big batch of U.S. numbers were the best bet for a bigger market move on Tuesday after a tight few days of trading, thinned out by U.S. and UK holiday weekends.
The euro held on to Monday's gains, largely the result of relief that EU parliamentary elections did not deliver a knockout blow to any of the bloc's more fragile, debt-ridden governments.
"More broadly, the dollar continues to struggle, and you can see that in the US rate curve and rate differentials which haven't moved in the dollar's favour," said Stephen Gallo, European head of FX strategy with BMO in London.
U.S. two-year bond yields have fallen around 10 basis points in the past month despite a blip higher at the end of last week, and are less than half their British equivalents.
"If the data, starting with durables today, does not show the beginning of a more encouraging bounce back from Q1, then the dollar is going to continue to struggle," Gallo added.
A raft of U.S. confidence indicators as well as orders for durable goods are due out later on Tuesday, starting at 1230 GMT.
The dollar lost 0.16 percent against the yen to stand at 101.80 in early European trade. It fell almost 0.3 percent against the Australian dollar and 0.2 percent against sterling.
The common currency climbed to $1.3656, up from a three-month low of $1.3615 hit as markets began to digest the results of the weekend's European elections.
Traders said a squeeze in short euro positions had given the euro some support overnight as it managed to stay above major technical markers such as its 200-day average against the dollar and 100-day average against the yen.
"It's a sad reflection of the lack of volatility in FX markets that we now report 30 point moves as being newsworthy," said Sean Keane, a director of Triple T Consulting and formerly a markets trader at Credit Suisse.
Prospects of policy action from the European Central Bank at its June 5 meeting have weighed on the common currency in the past few weeks and comments from ECB chief Mario Draghi on Monday reinforced those expectations.
Draghi said the bank must be "particularly watchful" for any negative price spiral in the euro zone, adding "more pre-emptive action may be warranted" to guard against a drop in price expectations.
Reuters reported earlier this month that the ECB is preparing a package of policy options for its June meeting. It includes cuts in all its interest rates as well as targeted measures aimed at boosting lending to smaller firms.
(Editing by John Stonestreet)