The dollar gained on Tuesday bolstered by release of data showing a sharp increase in US producer prices last month as well as strong foreign demand for US securities.
The jump in September PPI added fuel to expectations that the Federal Reserve will continue to raise interest rates to tame mounting price pressures, while the robust capital inflows in August suggest the United States is having no difficulty in funding its current account deficit.
Both are dollar-positive and investors reacted accordingly, keeping the dollar buoyed near a two-year high against the yen.
"PPI kicked off strong support for the dollar which continued with the (flows) data," said Charmaine Buskas, foreign exchange analyst with West Chester, Pennsylvania-based Economy.com. "Near-term considerations are supportive, that is for interest rate hikes, and longer term, the funding of US imbalances is also dollar supportive."
In late afternoon New York trading, the euro was down 0.6 percent at $1.1958, while sterling was 0.2 percent weaker at $1.7511.
The dollar was up 0.6 percent at 115.65 yen, having risen to a 25-month high of 115.94 yen earlier in the day.
The dollar was also up 0.5 percent against the Swiss franc at 1.2985 francs.
US producer prices jumped 1.9 percent in September from August, according to the Labour Department, well above the 1.1 percent forecast by economists. On an annual basis, PPI rose 6.9 percent.
Michael Woolfolk, senior currency strategist at The Bank of New York, said the $91.3 billion net inflow into US assets in August reflected healthy foreign appetite for dollar assets.
"I would say that this certainly beats even the most optimistic forecasts for (net) inflows, but is not overly unexpected in the sense we knew we were going to get at least adequate inflows to cover our trade deficit," Woolfolk said.
The US trade deficit, which forms the lion's share of the current account deficit and has been a heavy drag on the greenback in recent years, was $59.0 billion in August.
But the dollar was unable to break above 116 yen and the euro managed to hold up above $1.19, which prompted traders to square up positions slightly and push the dollar back down from its earlier highs.
Although the dollar was well bid across the board in US trading, it appears to have lost some of its earlier momentum.
Daniel Katzive, senior currency strategist at UBS in Stamford, Connecticut, said investors are maybe starting to get a bit nervous about the strength of recent inflation numbers.
"The market seems to be reacting a little more negatively to inflation data," he said, adding that currency markets are much less sensitive to asset flows data now than they were a year ago.
The euro found little support from data showing the German ZEW research institute's gauge of investor confidence rose slightly in October, boosted by lower oil prices but held back by worries over economic reform.
The euro is, however, holding above $1.1900, supported by solid central bank demand, market sources said.
The Canadian dollar pared losses after the Bank of Canada, as expected, raised benchmark interest rates by a quarter percentage point to 3.0 percent.
BoC hints that further monetary policy tightening is on the cards helped push the US dollar down to around C$1.1785 from its session high of C$1.1879, down 0.1 percent.
A security scare which briefly closed road tunnels in Baltimore had little impact on currency markets, traders said.