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Dollar bulls hear Yellen hint, sterling gains

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The dollar clung to modest gains early on Wednesday after bulls latched onto a comment by the head of the Federal Reserve that rates could rise sooner if employment continued to improve, while strong inflation sent sterling to a six-year high.

The dollar index last traded at 80.388, near the close in New York where it climbed 0.3 percent. The greenback was at one-week highs on the yen at 101.67, while the euro wallowed at a near one-month low of $1.3562.

Speaking to a Senate committee on Tuesday, Federal Reserve Chair Janet Yellen defended the current loose policy setting, saying the economic recovery was not yet complete.

Read MoreEarnings in focus as Fed shifts to rear view

Yellen said early signs of a pickup in inflation weren't enough for the Fed to accelerate its plans for raising interest rates, but conceded that this might change if the labor markets improved more quickly than expected.

"The testimony does not change our Fed forecast, but it does support our view that there is a risk that the first rate hike may occur sooner than our June 2015 forecast if the labor market continues to improve faster than the committee expects," wrote analysts at Barclays in a note.

Across the pond, surprisingly strong British inflation and house price growth prompted investors to raise bets that the Bank of England will lift interest rates before the year ends.

That helped push sterling higher across the board. It reached a fresh six-year high of $1.7190, and scaled a near two-year peak at 79.08 pence per euro.

Read MoreBoE holds fire amid fears of sterling strength

British inflation surged to a five-month high last month and house prices rose at their fastest in years.

Price pressure in New Zealand, on the other hand, was benign with the annual inflation rate coming in at 1.6 percent versus expectations for 1.8 percent. That was well within the Reserve Bank of New Zealand's (RBNZ) target range.

The outcome could take the pressure off the RBNZ to tighten policy much more this year, although another quarter point hike next week seems a done deal.

The kiwi dropped nearly half a U.S. cent on the data to a low of $0.8722, pulling further away from a recent high of $0.8839 and its post-float peak of $0.8842 set back in August 2011.

Read MoreWhy 2014's hottest currency won't lose its shine

Sentiment for the kiwi had already soured after international milk prices fell and volumes dropped at an auction held by New Zealand's Fonterra Co-operative Group, the world's biggest dairy exporter.

It's Australian counterpart also lost ground against a broadly firmer greenback, trading at $0.9367 after finding a bit of support at a one-week trough of $0.9348 overnight.

The near-term outlook for the Antipodean currencies now rests on a batch of economic data out of China, a major export market for Australia and New Zealand.

Read MoreMilk got your carry trade?

Any disappointment in the Chinese figures, which include industrial output and gross domestic product, will no doubt renew pressure on both currencies.

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