Sterling rose to a 3-1/2-week high against the euro on Monday, helped by speculation that the Bank of England may sound more hawkish on interest rates this week.
The dollar index, which tracks the greenback against a basket of six major currencies, was 0.38 percent higher at 91.697.
United States inflation data is due on Thursday and recent comments from Fed policymakers show a split on the outlook for inflation and how that will play out for future interest rate increases.
"Everyone's waiting for the inflation data tomorrow and the Fed next week", said Commerzbank currency strategist Esther Reichelt, in Frankfurt.
The dollar was buoyant against the yen on Wednesday, although it was capped against the euro with a potentially supportive spike in USA yields neutralised by a similar move by their German counterparts.
The dollar edged higher on Monday on relief that Hurricane Irma weakened to a tropical storm and North Korea did not conduct a nuclear test over the weekend as feared.
Since then, risk aversion has ebbed significantly, prompting a drive-up in U.S. Treasury yields to two-week highs and fuelling a comeback by the dollar.
"Dollar/yen shows the highest correlation to USA yields and the pair is benefiting from the latest rise in yields", said Yukio Ishizuki, senior currency strategist at Daiwa Securities. "Covering of dollar short positions created by macro-driven funds has been rapid and aggressive under such conditions".
"Now it's "wait and see" for US dollar investors", she said, adding that the only other factor that would be likely to trigger a significant move would be any further escalation of tensions around North Korea.
The euro added to modest overnight gains and was last up 0.1 percent at $1.1980.
Bitcoin was down nearly 5 per cent, just below just below $4,000, after Jamie Dimon, chief executive of JPMorgan Chase & Co, said the cryptocurrency is a "fraud" and would blow up.
While the USA 10-year Treasury note yield rose about 5 basis points overnight, its German bund counterpart also jumped almost 7 basis points, helping prevent the dollar from gaining on the euro.
Gold prices held steady on Wednesday as the dollar remained firm, with safe-haven demand for the metal buoyed after U.S. President Donald Trump's latest comments on tensions over North Korea.
The euro rose to a 2-1/2-year high of $1.2092 last week after a policy meeting by the European Central Bank gave bulls cause for short-term optimism towards potential policy tapering.
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