The Aussie was up at $1.0520, from $1.0468 just before the government released its consumer price report (CPI). It has traded a range of $1.0442 to $1.0527 so far, after ending at $1.0473 in New York.

Traders said speculators had been betting on a very low reading for underlying inflation but were caught out when it came in at 2.6 percent, above forecasts for 2.4 percent.

There was a similar reaction in interbank futures which skidded as the market pared back some of the sizable rate cuts already priced in.

The February contract dropped 0.030 points to 95.88, implying a 50-50 probability of a quarter point cut in the cash rate to 4.0 percent next month. The probability had been above 80 pct before the data.

Still, analysts emphasised that underlying inflation remained well within the Reserve Bank of Australia's (RBA) long-term target band of 2 to 3 pct and looked set to remain there.

Most thus expect the RBA to cut rates to 4 pct at its next policy meeting on Feb. 6, in part because the very strength of the Aussie is hurting many domestic sectors from manufacturing to tourism.

Immediate resistance for the Aussie, which is up 3 pct this year, seen at 1.0579 and support at $1.0428 and $1.0383.

The New Zealand dollar was steady around $0.8100, from $0.8109 in late local trading on Tuesday.

Kiwi may struggle to break higher, having risen around 4 pct so far this year, with support seen around $0.8050 and initial resistance at $0.8125 and then $0.8140.

Aussie and NZ dollars climb to two-month highs on a broadly softer yen. Aussie up 0.4 percent to 81.80 yen and the kiwi hovering around 62.95 yen.

The Aussie also broke above its 200-day moving average against the yen at 81.54, the first move above since Japan intervened to weaken the yen in October.

Asian markets still thinned by New Year holidays.

Reserve Bank of NZ has its policy announcement on Thursday with expectations the cash rate will be held at a record low 2.5 percent. The central bank is expected to remain cautious amid the volatile and uncertain global outlook.

New Zealand government bond prices lower with yields 3 basis points higher across the curve.

Short-dated Australian bond futures broke down through a major support level going back over two months. The three-year contract skids 0.10 points to 96.650.

The 10-year contract sheds 0.085 points to 95.965, having earlier touched its lowest in seven weeks.