Dollar hovers near two-decade high before inflation gauge

Investors will be closely watching the April US consumer price index reading later on Wednesday for any signs inflation may be starting to cool, with expectations calling for an 8.1 percent annual increase compared with an 8.5 percent rise recorded in March.

After the Fed raised its benchmark overnight interest rate by 50 basis points last week, the largest hike in 22 years, investors have been attempting to assess how aggressive the central bank will be.

Markets are priced for another hike of at least 50 basis points at the central bank's June meeting, according to CME's FedWatch Tool. The greenback has climbed nearly 9 percent this year amid an increasingly hawkish Fed, as inflation burned hotter than policymakers had expected.

Commonwealth Bank of Australia sees the risk tilted to further gains from here. "The USD's reaction to the CPI will be asymmetrical in our view," CBA currency strategist Joseph Capurso wrote in a client note.

"A positive surprise will encourage markets to increase pricing for a 75 (basis point) increase in the Funds rate later in the year and support the USD, while a negative surprise will keep pricing for 50bp increases in June and July intact and leave the USD steady." The euro "remains heavy" above $1.05, he wrote, and a strong CPI print could push the Australian dollar below $0.69.

The Aussie ticked up 0.17 percent to $0.69 on Wednesday but did not bounce much from the 22-month trough of $0.69 touched on Monday.

Sterling also struggled near a 22-month low at $1.22 from the start of the week, last trading flat at $1.23. Bitcoin nursed its wounds after dropping to the cusp of $30,000 this week for the first time since July of last year, changing hands at $30,758.92.