The dollar was close to a weekly high on Wednesday after a surge in US yields resulted in sharp gains against the euro this week, despite growing bets that the Federal Reserve will raise interest rates.
The pound was flat against the dollar after data showed British inflation rose 5.4% in December, to its highest level in 30 years, raising rate hike expectations.
Ambrose Crofton, Global Market Strategist at J.P. Morgan Asset Management, said he expects that the Bank of England will raise interest rates by 25 basis points in February.
The Bank of England will be able to keep its support for the economy as it looks to get a better handle on inflation because of the strength of the labour market, he said.
The dollar was boosted by U.S. Treasury yields rising ahead of Federal Reserve policy meeting next week.
The ten-year Treasury yield went up on Wednesday to touch a new two-year high of 1.9%.
Analysts expect the Fed to raise interest rates amid a stable labour market and rising inflation, said Moritz Paysen, FX trader at Berenberg.
He said that it is not a question of if, but how quickly and strongly interest rates will be raised.
The impression is that the ECB European Central Bank continues to take its time to get a grip on inflation in the euro zone. He said that this is another argument on the market that is helping the U.S. dollar to regain its strength.
The euro was flat, back on its 50 day moving average at $1.1333, after it had its sharpest daily drop in a month.
The pound traded at $1.3593, a distance from the almost 11 week high touched last week. The pound was kept in check by talks of a leadership challenge to Prime Minister Boris Johnson.
The U.S. dollar index, which measures the dollar against six major peers, was 0.04% lower at 95.670, the overall result was.