Credit: Reuters/Kacper Pempel
Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc and Russian Ruble pictured in Warsaw January 26, 2011.
Atlanta Fed President Dennis Lockhart, seen as a centrist in policy terms, said on Tuesday a cut in the Fed's bond-buying operations remained a possibility in December.
At the same time, last month's U.S. government shutdown may undermine the reliability of economic data through December, Lockhart added. That could provide another reason not to expect policy action when the Fed holds its next policy meeting, on December 17-18.
But in the absence of U.S. data, investors chose to see the harder side to Lockhart's comments even as attention is now turning to comments that incoming Fed chair Janet Yellen will make at her Senate confirmation hearing on Thursday.
'Markets have to speculate on better data or any of the known hawks saying something, so they anticipate a closer end to quantitative easing,' said Joseph Trevisani, chief market strategist at WorldWideMarkets, in Woodcliff Lake, New Jersey. 'But it's not real. The Fed will stay accommodative until at least the end of the first quarter.'
European trading was dominated by sterling's outperformance after the Bank of England said there was a chance British unemployment could fall to 7 percent in the fourth quarter of 2014. Data published earlier on Wednesday showed Britain's unemployment rate fell to 7.6 percent in the three months to September.
That kept alive speculation the UK central bank might raise interest rates far earlier than it has flagged so far, highlighting a divergence between Britain's monetary policy path and that of both the European Central Bank and the Bank of Japan.
'The tone struck in the quarterly inflation report was that of a more optimistic BoE, with Governor (Mark) Carney even suggesting that it's hard to ignore that the 'glass is half full',' said Chris Vecchio, currency analyst at DailyFX.com in New York.
The euro fell to $1.3428, down 0.1 percent on the day, dragged down partly by its losses against the pound but holding above the two-month low of $1.3295 struck after Thursday's ECB rate cut.
The euro was also pegged back by more evidence of falling price pressures in the euro zone, reinforcing concerns about easing inflation that led the ECB to cut rates last week. Data on Wednesday showed Spanish prices fell for the first time in four years in October.
'The Spanish inflation numbers were slightly below their earlier reading which tells you that the ECB will have to take fresh easing measures,' said Alvin Tan, currency strategist at Societe Generale in London.
'Having said that, we do not expect the euro to fall sharply against the dollar unless we get more signs that the Fed will start to taper. For that, Yellen's confirmation hearings will be important for near-term direction in the dollar.'
Sterling rose to $1.6001, rebounding from Tuesday's two-month low of $1.5852 after the better-than-expected UK jobs report and a raised growth forecast from the central bank. [ID:nBELDME92U] <GBP/>
'The BoE has acknowledged that the UK is doing much better than it had forecast three months ago,' said Howard Jones, partner at RMG Wealth Management in London. 'We are certainly long sterling, especially against the euro and the Swedish crown.'
The dollar eased 0.2 percent to 99.44 yen, not far from a two-month high of 99.79 yen struck on Tuesday. The U.S. currency is up about 0.4 percent so far this week against the yen, having drawn strength from rising U.S. bond yields.
Higher U.S. bond yields tend to favor the dollar by making dollar-denominated debt more attractive to bond investors. The 10-year U.S. yield has risen since last Friday's strong U.S. jobs data for October.
(Reporting by Nick Olivari; Editing by James Dalgleish)
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