The U.S. dollar eased off of a fresh 16-month high on Wednesday, while the euro remained on its back foot as investors weighed central bank tightening odds amid rising pricing pressures, with the U.S. Federal Reserve seen hiking rates as early as mid-2022.
The dollar index, which measures the currency against a basket of six rivals, drifted 0.034% lower to 95.91 after earlier touching 96.266 for the first time since mid-July 2020.
Versus the yen, the greenback hit a 4-1/2 year high and tested the $1.12 levels against the euro, helped by robust U.S. retail sales data and hawkish comments from Fed policymakers.
"The market is now starting to understand that you're going to have divergent themes in FX," said Edward Moya, senior market analyst at FX broker Oanda. "I think that you're in for a choppy period," he said.
Money markets are now pricing in a high probability of a Fed rate increase in June, followed by another in November. CME data suggest a 50% probability of a 25 bps rate hike by July 2022.
"The market assumes that the key rate will be hiked in the second half of next year," said Antje Praefcke, an FX strategist at Commerzbank. "For me too, the dollar remains a 'buy on dips' short-term."
U.S. retail sales rose more than expected in October, a report showed on Tuesday, adding to the dollar's momentum from last week when a report showed U.S. consumer prices rising at the highest rate since 1990.
Data on Wednesday showed inflation in October hit a 10-year high in Britain and an 18-year high in Canada.
The pound climbed to a one-week high versus the dollar and a 21-month high against the euro after the British data, which boosted expectations of a rate hike by the Bank of England as early as next month.
The Canadian dollar eased, along with oil prices, which were dampened in part by the strong U.S. dollar.
The greenback rose as far as 114.975 yen, its highest since March 2017 before retreating to 114.55 yen.
The euro was last down 0.12% at $1.13065.
The dollar's rise has also pushed broader FX market volatility higher, with one gauge rising to a 8-month high of nearly 7%.
In cryptocurrencies, bitcoin traded just south of $60,000, after dipping below that level on Tuesday for the first time this month.