The dollar slipped on Wednesday, with 2-year and 10-year U.S. Treasury yields also retreating after hitting about two-year highs, but the greenback remained well supported as investors braced for a widely expected rate hike in March. Bond yields in other major economies rose, with the euro, sterling, Canadian dollar, Australian dollar and New Zealand dollar all strengthening against the dollar. The dollar index fell 0.15% to 95.60, with the 10-year U.S. Treasury yield hitting a two-year high of 1.900%. U.S. housing starts unexpectedly rose in December amid unusually mild weather, data showed. Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units, before paring losses in the dollar. The Fed will meet next week and may provide details and clarity on ending quantitative easing in March. The Fed is also likely to signal that it will raise interest rates in March after ending quantitative easing.

Sterling was higher after data showed that Britain's consumer price index (CPI) rose 5.4% in December, the biggest gain in 30 years, raising expectations for a rate hike. However, rumours of a challenge to Prime Minister Boris Johnson's leadership capped gains.

Juan Perez, senior foreign exchange trader and strategist at Monex USA, said central banks are now getting evidence that the pace of inflation did not slow in the fourth quarter, and in fact countries like the U.K. saw something not seen since the early 1990s CPI readings, we think the dollar will rise in the short term, but don't ignore other currencies, the market has fully priced in the Fed's rate hike expectations.

The euro was up 0.16% at 1.1343 against the dollar, after posting its biggest one-day drop in a month in the previous session. Germany's 10-year bond yield rose above 0% for the first time since 2019 on Wednesday, marking a possible inflection point for the euro zone bond market, which has been marked by years of negative yields, and provided support for the euro as a whole. Germany's 10-year bond yield, seen as a benchmark for the entire euro zone, rose as high as 0.025% and was last at minus 0.007%, largely unchanged on the day. However, Bank of America continued to be bearish on the euro, believing that the Federal Reserve may raise interest rates more than the market expects due to persistent inflation.

Meanwhile, the euro fell to a 23-month low against the pound after sizzling inflation data from the UK. EUR/GBP was little changed at 0.8333 in late trade. Sterling was up 0.12% at $1.3612 and was also supported by a surge in British bond yields, with two-year yields rising to 0.958%, the highest level since March 2018.

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