Dollar rises following its worst dip in two months as Fed Chairman Powell reiterates his aggressive stance.

The dollar moved up on Wednesday, a day after registering its largest single-day slump in more than two months, as Federal Reserve Chairman Jerome Powell sounded a more hawkish tone as the central bank tackles rising inflation.

Powell promised that the Federal Reserve will raise interest rates as far as necessary, even above neutral, to combat a spike in inflation that he warned endangered the economy's foundation.

The neutral rate, which is predicted to be about 3.5 percent by mid-2023, is the point at which economic activity is neither simulated nor restricted.

"It's a strong message to the market that the Federal Reserve will be raising interest rates, most likely at a rapid pace, to rebuild their credibility on the inflation front," said Jane Foley, head of FX at Rabobank.

"The aggressive Fed is the reason why mood is a little more fragile this morning than it was yesterday."

The US dollar index was up 0.3 percent at 103.57 at 1055 GMT, after falling to a two-week low on Tuesday after a 0.9 percent dip. Last week, it surpassed 105 for the first time in two decades.

A day after European Central Bank policymaker Klaas Knot suggested a 50 basis point rate hike in July is feasible if inflation broadens, the euro briefly fell below $1.0500, erasing a one-week peak.

Knot is one of the most hawkish ECB members, according to Commerzbank (ETR:CBKG) analysts, albeit his viewpoint does not always represent that of the majority of the board.

"Regardless, Knot opens up a fresh line of attack for the ECB hawks by making this statement," Commerzbank analyst Ulrich Leuchtmann said in a note.

More ECB officials drummed up support for interest rate rises in the coming months on Wednesday. Rate rises of up to 108 basis points are now expected by money markets for the remainder of the year.

The ECB should move out of negative interest rate zone fast to prevent unanchored inflation expectations, according to Finland's Ollie Rehn, while Spain's Pablo Hernandez de Cos believes rates will begin to climb early in the third quarter.

The remarks had little immediate impact on the euro, nor did statistics showing that consumer price inflation hit a new high of 7.4% in April, albeit this was trimmed down from an original estimate of 7.5 percent.

At $1.05175, the single currency was down 0.3 percent.

The pound sank as low as $1.23725 as statistics showed that British inflation soared to its highest annual rate since 1982 last month, putting pressure on policymakers.

The Australian dollar fell 0.1 percent to $0.7025 as wage growth in Australia slowed to a trickle last quarter, prompting investors to hedge against more interest rate hikes.

Following last week's volatility, cryptocurrency markets remained rather calm. Bitcoin fell by roughly 2% and was last selling at little under $30,000. Ether remained over $2,000, but was still down just over 2%.