(Updates prices at 1107 GMT; adds comment para 14, UK bank stress test details para 15)
The dollar sank to a two-month low on Wednesday ahead of a key read of U.S. inflation, while sterling hit 15-month highs after wage growth data fed expectations that the Bank of England (BoE) has further to go in raising rates.
The yen strengthened past 140 to the dollar for the first time in a month, helped by growing expectations that the Bank of Japan (BOJ) will unveil changes to its ultra-low interest-rate policy at this month's meeting.
Investors were laser-focused on U.S. inflation data due later on. Core consumer prices, which exclude food and energy, are expected to have risen 5% on an annual basis in June. The figures could give a steer on how much more the Federal Reserve might raise interest rates.
Ahead of the release, the U.S. dollar fell to a two-month low against a basket of currencies =USD , underperforming most notably against the Japanese yen JPY=EBS .
The key number in the consumer price report will likely be the monthly change in the core rate, according to Jordan Rochester, currency strategist at Nomura.
A number of indicators are pointing clearly to a marked drop in inflation, including used-car prices, meaning some in the market are looking for a rise of just 0.2% in the core rate in June. Economists polled by Reuters expect a rise of 0.3%.
"In terms of the latest rhetoric and narrative, people are looking for 0.2%. That's what we're looking for. If we get 0.3%, that's slight dollar strength, so we could see dollar/yen above 140. If we get 0.4%, it means all the models are wrong and we're missing something," he said.
"I think that will materially move the needle, because all the other charts we have suggest that inflation pressures inthe U.S. really are slowing down quite aggressively," he added.
Against the yen, the dollar fell by as much as 0.76% to a one-month low of 139.32. It was last down 0.6% at 139.55.
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Meanwhile, the euro EUR=EBS rose 0.1% to $1.102, nudging at two-month highs, while the Swiss franc CHF=EBS rose as much as 0.3% to a 2-1/2 year high of 0.8765.
"In many ways, it’s like FX got bored of waiting for a trend, bored of watching equity markets and their spectacular year-to-date rally, and we’ve decided to trade the U.S. disinflation narrative ahead of the data release which supposedly everyone is waiting for," RBC global head of FX strategy Elsa Lignos said said.
Sterling GBP=D3 hit a 15-month high of $1.2970, driven by expectations for the BoE to deliver more rate rises to tame UK inflation, which is the highest of any major economy.
On Wednesday, a BoE banking system stress test showed Britain's eight largest lenders have enough capital to ride out a worse economic crisis than that seen in 2008, thereby underpinning expectations for UK rates to keep climbing.
Markets are priced for a peak BoE rate of around 6.4% by March, up from 5% right now.
0#BOEWATCH U.S. Treasury yields, meanwhile, continued to fall, sapping the dollar. The benchmark 10-year note yield US10YT=RR was last down 3 basis points at 3.905%, heading for its third straight day of declines. Two-year yields US2YT=RR fell 4 bps to 4.85%.
Elsewhere, the New Zealand dollar NZD=D3 was down 0.2% at $0.6187, having fluctuated in choppy trade after the Reserve Bank of New Zealand (RBNZ) kept rates on hold as expected and flagged that they would remain on hold for some time.
The Australian dollar AUD=D3 was flat at $0.6685.
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