The dollar slipped against most major currencies on Thursday as the positive impact of hawkish Federal Reserve comments faded and investors waited for more signs on the data front to confirm that more large rate hikes to curb inflation were coming.
The Bank of England was widely expected to raise interest rates by the most since 1995, with sterling rising before the rate decision at 1100 GMT.
Fed officials have continued to push back against the perception that U.S. interest rates were close to peaking. San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari voiced their determination overnight to rein in high inflation.
But the impact of the hawkish rhetoric on the dollar appeared to be fading, with the currency in a more defensive mood as the London session wore on.
"Yesterday we had some hawkish comments, but maybe that's not enough and investors will be looking for confirmation from data, especially tomorrow's payrolls number," said ING currency strategist Francesco Pesole, referring to U.S. jobs data.
"The effect on the dollar is fading today. Risk sentiment is also more upbeat and it doesn't look like markets are too worried about the Taiwan situation."
The dollar index, which measures the greenback against six peers, was at 106.18, down about 0.3% but holding above a one-month low hit earlier this week.
The euro was up 0.25% at $1.0195. The dollar was 0.2% firmer at 134.13 yen.
The dollar's strength has yet to peak, a Reuters poll released on Thursday showed. Of those polled, 70% thought the dollar was yet to peak in this cycle, even after the dollar index hit its highest level in two decades in July.
Money markets price in a 50 bps hike at the Fed's September meeting, and a roughly 44% chance of another massive 75 bps increase. The Fed hiked rates by 75 bps at its meeting in June and July.
Britain's pound rose 0.3% to $1.2187. The BoE was widely expected to raise rates by an aggressive 50 basis points to 1.75%, the highest level since late 2008.
The BoE has never raised the Bank Rate by a half point since it was made independent in 1997.
Jane Foley, head of currency strategy at Rabobank in London, said sterling's reaction would largely depend on what the BoE says about the outlook for further large rate moves.
"You have to ask, can the BoE be any more hawkish than other central banks, and the answer is probably not," she said.
Risk currencies also rallied as a bit of nervous tension over House of Representatives Speaker Nancy Pelosi's visit to Taiwan dissipated.
The Australian dollar was at $0.6968, up 0.6%. New Zealand's currency was also 0.6% higher at $0.6309
(Reporting by Dhara Ranasinghe; Additional reporting by Alun John in Hong Kong; Editing by Bradley Perrett and Mike Harrison)