The dollar held near a four-month high against a basket of major currencies on Wednesday, buoyed by the outlook for a strong US economy and rising yields amid signs of slowdown elsewhere, especially in Europe.

The dollar's index rose 0.66 per cent on Tuesday and reached as high as 92.57, its firmest since Jan. 10. It rose above its 200-day moving average for the first time in a year, triggering a wave of short-covering.

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to bump it up next month, given signs of possible acceleration in the US economy.

The Institute for Supply Management (ISM) survey published on Tuesday showed US factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building. Data published last month showed the Fed's favourite gauge of consumer inflation had jumped in March.

“We are seeing a roll-back of dollar selling since the start of the year. If the upcoming US jobs data shows gains in wage rises, that would propel the dollar higher,” said Shinichiro Kadota, senior currency strategist at Barclays Capital in Tokyo.

Investors also think US President Donald Trump's tax cuts and spending plans, unusual economic stimulus at a time of solid economic expansion, could further fuel inflation and prompt a faster pace of rate rises. In contrast, expectations of rising rates are dwindling in Europe as recent economic figures suggest cooling momentum after stellar growth last year.

The British pound fell to a four-month low of $1.3588 on Tuesday after soft UK manufacturing data, having fallen nearly 6 per cent from a post-Brexit referendum high of $1.4377 hit on April 17. It was the latest in a run of mediocre economic data that further reduced the chances of a rate increase from the Bank of England when it meets next week.

Swap markets now indicate around a 15 per cent chance of a rate increase this month, down from 90 per cent in early April. The pound last stood at $1.3607, flat from late US levels. The euro fell to $1.1981, a low seen in mid-January and last stood at $1.1998.

The common currency also eased to 131.58 yen, its lowest in three weeks, and last fetched 131.75 yen. The flash estimate of the euro zone due at 0900 GMT is expected to show growth in the 19 country currency bloc slowing to 0.4 per cent quarter-on-quarter in January-March from 0.6 per cent in the preceding quarter.

While that would be hardly a bad figure, it would undermine the case for an earlier withdrawal of the European Central Bank's stimulus. The dollar rose to as high as 109.89 yen, a three-month high and last changed hands at 109.85. Elsewhere the Australian dollar sank to an 11-month low of $0.74725 in overnight trade, while gold also hit a four-month low of $1,301.9 per ounce.

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