Illustration shows U.S. Dollar banknotes
U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. Reuters

The euro nursed losses on Wednesday and has helped the dollar to make a strong start to 2023, after a surprise slowdown in German inflation rallied bunds and sent the common currency sliding.

The euro fell 1% overnight, its sharpest drop in more than two months, and it hovered near three-week lows at $1.0550 early in the Asia session. Along with a nervous mood as U.S. stocks fell, the move gave the dollar a broader boost and stopped a rising yen in its tracks.

The yen was last steady at 131.20 per dollar. The U.S. dollar index rose 1% on Tuesday to 104.73. The jump tapped the brakes on a three-month slide for the index.

Headline German CPI fell to an annual 8.6% in December, from 10% the previous month, against expectations for 9.1%. German bunds and other European bonds rallied sharply.

Meanwhile, shares in U.S. car maker Tesla also plunged 12% after the company missed delivery expectations, weighing on the mood and broader Wall Street indexes.

"The downside surprise in German CPI...had an impact," said National Australia Bank's head of FX strategy, Ray Attrill, in Sydney, while adding the weakness in the U.S. stock market pulled back on the Australian and New Zealand dollars.

The Aussie lost 1% on Tuesday and was steady at $0.6733 in morning trade. The kiwi also fell 1% and hovered at $0.6248. [AUD/]

Sterling fell 0.7% overnight and last bought $1.1986. [GBP/] The dollar's strength pared gains for China's yuan, but seasonal demand ahead of the Lunar New Year and hopes for recovery on the other side of COVID infection waves have put in support.

In offshore trade, the yuan was firm at 6.9160 per dollar. The Thai baht has scaled six-month highs on tourism hopes as China drops quarantine for travellers.

The calendar is fairly bare in Asia on Wednesday, with traders looking ahead to a U.S. manufacturing survey and minutes from last month's Federal Reserve meeting, both due later in the day, and jobs data scheduled for later in the week. "We're back in to some A-league economic data, so maybe we'll get some more fundamentally-driven price action out of that," said NAB's Attrill.