The U.S. dollar extended broad-based gains on Wednesday after marginally higher-than-expected U.S. inflation data coupled with earlier concerns over European banks sent the greenback to one-week highs against the euro.
A slight uptick in September U.S. CPI data, a 0.1 percent rise versus a mean forecast of no change, helped push U.S. Treasury yields up, supporting the greenback.
"To a large extent, the dollar is following U.S. yields. The sharp drop in U.S. yields last week was driven by fears of a slowing recovery and disinflationary pressures," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
"There weren't any big surprises in CPI but the fact that it was a little firmer at the headline kind of helps nudge the market's expectations closer to the Fed's, even though the gap is still quite large," he said.
Spanish news agency EFE, citing unnamed financial sources, said 11 euro zone banks were set to fail this weekend's long-awaited stress tests. That followed a Reuters report on Tuesday that the European Central Bank was looking at buying corporate bonds to boost euro liquidity.
After the U.S. data, the euro dropped to a fresh one-week low of $1.2657, down 0.44 percent on the day. The dollar traded at 107.18 yen, a gain of 0.20 percent.
Sterling dropped 0.43 percent to $1.6040, undermined by minutes from a Bank of England meeting showing the Monetary Policy Committee's nine members saw "few signs" of inflation pressures building. This indicated the drive toward tighter monetary policy was losing some steam. Just two members voted to raise interest rates, according to the minutes.
"Calls for a rate hike early next year are diminishing, and if things continue as they are it might not be long before we see the first hike priced in for early 2016 instead," said Alex Edwards, head of the corporate desk at UKForex.
The ECB, which will publish the test outcomes for 130 banks on Sunday, warned after the EFE report that final results had not yet been sent to the lenders involved, and it could not comment on individual institutions. Any inferences drawn would be "highly speculative," it said.
But the report adds to a longer list of concerns about getting Europe onto a stronger growth footing and avoiding sinking into a debilitating cycle of deflation.
Several sources told Reuters on Tuesday the ECB was considering buying corporate bonds on the secondary market in an effort to boost the flailing euro zone economy, and could begin buying the bonds early next year.
ECB Governing Council member Luc Coene told Belgian media there were no concrete plans for corporate bond purchases, but said this could be a way to prevent the bank from paying too much for just covered bonds and asset backed securities. (Additional reporting by Anirban Nag, Jemima Kelly and Patrick Graham; Editing by Mark Heinrich and Meredith Mazzilli)