The dollar rose on Tuesday as U.S. bond yields stood firm on the view that the world's biggest economy is expanding enough for the Federal Reserve to raise interest rates next year despite data showing a mild rise in domestic prices in June.
The euro fell to an eight-month low against the greenback, breaking below key support at $1.35, largely on expectations the European Central Bank will provide more stimulus to aid the fragile Eurozone economy. The euro also hit a 5-1/2 month low versus the Japanese yen.
The yen and Swiss franc gave back some of their recent gains against the dollar as traders stepped back into stock markets and riskier assets worldwide. The losses of the two currencies, however, were limited due to the ongoing violence in Ukraine and the Middle East, analysts said.
Inflation "continues to be on a rising trend in the U.S. It fits nicely to the view the Fed might raise rates sooner rather than later," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The benchmark U.S. 10-year Treasuries yield was little changed at 2.469 percent after the U.S. government reported domestic inflation rose 0.3 percent in June, matching analyst forecasts, but core inflation, which strips out volatile food and energy costs, crept up 0.1 percent, half of what analysts had projected.
The weaker-than-expected core inflation reading was not enough to change the market's outlook that the Fed will continue on its slow path to paring its bond purchase program in October and raise interest rates in the latter half of 2015.
U.S. yields briefly turned higher as Wall Street share prices climbed. [.N]
The euro lost 0.4 percent against the dollar to $1.3469, hitting a U.S. session low at $1.3460, the lowest level since Nov. 21. It traded at 136.64 yen EURJPY=, down 0.37 percent, after falling earlier to as low as 136.58 yen, a level last seen on Feb. 5, according to Reuters data.
"With the divergence in policy stands, that supports the dollar to strengthen against the euro," said Eric Villoria, currency strategist at Wells Fargo Securities in New York.
The yen and the Swiss franc, which traders had piled into on geopolitical uncertainty, declined against the dollar as investor anxiety about the fighting in Ukraine and Gaza relaxed a bit.
The greenback edged up 0.06 percent to 101.43 yen JPY= and rose 0.5 percent to 0.9022 Swiss francs CHF=.
Among other developed currency markets, the Australian dollar rose after the country's central bank chief, Glenn Stevens, said he was happy with current interest rate levels and made no attempt to talk down the currency.
The Aussie AUD=D4 traded 0.2 percent higher versus the dollar at $0.9394.
(Additional reporting by Patrick Graham in London; Editing by Peter Galloway and Paul Simao)