Meanwhile European and US stocks seemed unperturbed, with the DAX striking a new record high.
The outcome of the Federal Reserve's interest-rate meeting later Wednesday is seen as all but certain -- a rate rise by the central bank.
However data showing a 0.1 percent dip in consumer prices last month reinforced concerns already present that persistent signs of weakness in the world's largest economy and doubts about the future of President Donald Trump's big-spending, tax-cutting agenda might lead the Fed to hold off on any further increases in rates this year.
It had previously been signalling another two hikes in 2017.
"I think this could be it -- one more and done," said market analyst Michael Hewson at CMC Markets on Twitter.
"With the rate hike now 96 percent priced in, focus will fall on the Fed's forward guidance and importantly their views surrounding low inflation," said Stephen Innes, senior trader at Oanda trading group.
While the dollar tanked after the inflation announcement, the rise in the value of the euro and pound -- which briefly topped $1.28 -- didn't hurt European stocks.
The DAX in Frankfurt struck a new record high, breaking through the 12,900 level for the first time, even though a closely-watched survey showed that confidence among German investors fell back in June, breaking a run of euphoric mood indicators in recent months.
The ZEW institute's poll measuring economic expectations among financial players shed 2.0 points to 18.6 points in June -- well below its long-term average of 23.9.
Despite the June drop, "prospects for the German economy remain favourable, not least thanks to the positive development of economic growth in the European Union in the first quarter of this year", ZEW president Achim Wambach said in a statement.
In Britain meanwhile, official data showed that the unemployment rate remains at 4.6 percent, the lowest level for 42 years. At the same time however, average weekly earnings are falling against a backdrop of rising UK inflation caused in large part by a weak pound lifting import costs.
"There was more bad news for the UK consumer on Wednesday after regular wage growth, excluding bonuses, fell to 1.7 percent, its lowest level since late 2014," said Kathleen Brooks, research director at traders City Index.
"Falling real wage growth is not a new theme, but the fact that inflation-adjusted wage growth has continued to fall to its lowest level for three years, is likely to keep a lid on" a recovery for sterling, which has fallen sharply for much of the time since Britain last year voted to exit the European Union.
Nevertheless, the FTSE 100 rose 0.3 percent in afternoon trading.
Oil prices fell after the release of US energy inventory numbers -- a key signal regarding crude demand in the world's biggest economy -- showed an unexpected increase in stocks.
Earlier on Wednesday the International Energy Agency said Wednesday that global oil output will expand faster than worldwide demand next year, primarily as US producers rack up crude production, and that could hamper exporters' efforts to prop up prices.
The IEA's assessment came a day after OPEC complained that increased output in the US was slowing efforts to rebalance supply and demand in the oil market.