The dollar strengthened on Thursday on expectations that the U.S. Federal Reserve will will not be in a hurry to cut interest rates, while the pound lags against peers in the market after dovish comments from Bank of England Governor Andrew Bailey.
Sterling fell to a two-week low against the US dollar after Bailey said in an interview that the central bank may become "more proactive" in cutting rates if there is more good news on inflation.
Bailey has sounded more dovish in recent weeks, saying last month that he was "optimistic" that inflationary pressures would ease enough for the central bank to cut rates further.
Sterling eased 1.2% to $1.31040 after expectations of a slower rate cut by the BoE helped sterling hit a more than two-year high last week and outperform G10 peers for the rest of the year.
"The Bank of England getting closer to accelerating rate cuts will start to reduce sterling's strengthening," said Lee Hardman, senior currency analyst at MUFG.
The yen hit a more than six-week low against the US dollar after Japan's new prime minister said on Wednesday, following a meeting with central bank governors, that the country was not ready for further rate hikes.
U.S. safe haven currency firmed across the market following heightened tensions in the Middle East after Iran's ballistic missile attack on Israel, which sparked vows of retaliation.
The US dollar index, which measures the currency against six other major currencies, strengthened 0.2% to 101.605, after hitting a three-week high of 101.920.
U.S. private employment data. Wednesday's better-than-expected reading boosted expectations for a strong nonfarm payrolls reading on Friday, which could be critical for the rate of Fed policy easing.
Rising geopolitical risks this week and expectations of looser policy outside the U.S. has helped the US dollar recover from its lowest level in more than a month on Friday, Hardman said.
Currently, market players are placing a 35.2% chance of another U.S. rate cut. of 50 basis points on November 7, based on CME Group's FedWatch Tool, down from 49.3% a week ago, but still considered too high according to Ray Attrill, head of FX strategy at National Australia Bank.
The euro slipped to a three-week low after normally hawkish ECB policymaker Isabel Schnabel took a dovish tone on inflation, strengthening bets for a rate cut this month.
The euro was at $1.1043 after touching $1.1025 for the first time since September 12.
The Swiss franc hit a three-week low against the US dollar after softer-than-expected Swiss inflation data bolstered bets on more rate cuts by the Swiss National Bank.
The Swedish krona also fell after Riksbank Deputy Governor Per Jansson said a 50 basis point reduction was likely this year.
