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The greenback gained as much as 1 percent on Wednesday after
Yellen's speech, which turned investors back to the narrative of
strong growth and rising inflation that drove the currency
higher after Donald Trump's presidential election victory in
November.
A correction since late December means the dollar is still in
the midst of its worst four-week performance since August,
reflecting concerns that Trump would prefer a weaker currency
and more generally may stoke global political uncertainty.
But Fed policymakers' expectations of three rate rises this year
are the bedrock of predictions for more dollar gains.
"We have washed out a few positions this week and we're back to
thinking about the underlying fundamentals," said Jeremy
Stretch, head of currency strategy at CIBC in London.
"Yellen's comments are interesting and constructive overall ...
but the market does not want to be caught long ahead of the
president-elect speaking (on Friday). For now it is cautious
dollar buying rather than anything stronger."
The dollar index inched up 0.1 percent in morning trade in
Europe. It was steady at 114.60 yen <JPY=> but gave back about
0.3 percent against the euro at $1.0665.
Yellen is due to speak again late on Thursday before Trump's
inauguration on Friday.
Tuesday's dollar sell-off came after the president-elect said
the currency's strength was "killing us" in trade ties with
China and gave signs he would reject a Republican initiative on
border taxes, which had been expected to support the currency.
"Of all the speakers we're getting ... the one I'm going to
listen to most for now will probably still be Janet Yellen,"
said Societe Generale strategist Kit Juckes.
"As the U.S. economy approaches full employment, as wages rise
but inflation rises nearly as quickly, how hawkish the Fed dares
to be will determine how much the dollar rises."
The day's other big set-piece is the European Central Bank's
policy decision and news conference, though expectations of
another strong message that would move the euro are limited.
With growth and inflation picking up pace slowly, the bank is
expected to argue it needs to maintain its loose monetary policy
stance to keep the recovery on course, even if that raises
hackles in Germany over rising in inflation.
"It will be interesting to see whether (ECB President Mario)
Draghi is pressed in the briefing on any degree of dissent
within the council," CIBC's Stretch said.
Sterling, which had jumped 3 percent on Tuesday to vault above
$1.24 after British Prime Minister Theresa May's Brexit speech,
was trading above $1.23 per dollar, having fallen sharply on
Yellen's speech.
(editing by John Stonestreet)
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