U.S. benchmark 10-year yields were last at 1.137%, down about 2 basis points from Tuesday's level.
Federal Reserve Chairman Jerome Powell did not do the dollar any favors, as he struck an overall dovish tone on Wednesday and affirmed that the U.S. central bank will keep interest rates at current levels until the economy has reached maximum employment and inflation stays above 2% for some time.
The dollar extended losses after data showed underlying U.S. inflation remained benign. Excluding the volatile food and energy components, the CPI was unchanged for a second straight month.
"The dollar's gains have certainly lost momentum and the underlying trend of weakness could likely persist. Today's action really centered around the CPI," said Amo Sahota, executive director at Klarity FX in San Francisco.
"The market expected inflation to pick up a little bit and it's just benign at this point. The reflation trade is not quite there yet," Sahota added.
The dollar index drifted to a two-week low of 90.249, posting its third day of losses. It last traded 0.1% lower at 90.377. Prior to this week, the dollar had gained more than 2% since the beginning of the year, as investors covered over-extended short positions on the currency.
Traditionally viewed as a safe haven, the dollar has sunk against major peers as optimism over monetary and fiscal support, robust corporate earnings and coronavirus vaccines bolstered risk sentiment.
In the cryptocurrency market, bitcoin consolidated recent gains on Wednesday, trading 2.7% lower at $45,208. It hit a new high of $48,216 on Tuesday following Tesla's disclosure of a $1.5 billion investment in the virtual currency.
Rival virtual currency ethereum, which often moves in tandem with bitcoin, reached a record $1,839 on Wednesday before pulling back slightly. It was last down 1.5 at $1,746.
Foreign exchange traders, meanwhile, have been waging a tug-of-war over the impact on the dollar of U.S. President Joe Biden's planned $1.9 trillion pandemic-related fiscal stimulus package.
On the one hand, the government expects to speed up a U.S. economic recovery, bolstering the currency. But on the other, it could heat up inflation, which would lift riskier assets at the dollar's expense.
The dollar gained 0.1% against the yen to 104.64 yen. The Japanese currency earlier hit its highest against the greenback since Jan. 29.
The euro edged up to $1.2126, adding to a three-day gain and hitting its highest since the start of February.
The British pound set fresh three-year highs of $1.3865 and was last up 0.2% at $1.3840.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and Will Dunham)
By Gertrude Chavez-Dreyfuss
