The greenback climbed broadly but its gains were strongest against the yen, which slid as much as 1 percent after the Bank of Japan kept monetary policy unchanged JPY=.

On Monday the yen had surged along with fellow safe-haven the Swiss franc after deadly incidents in Turkey and Germany, according to Reuters.

Both currencies have since given up those gains.

Yellen said late on Monday that the U.S. labor market had improved to its strongest in almost a decade, suggesting wage growth is picking up.

The Fed chair did not mention monetary policy, but some analysts said the fact that she did not pour cold water on investors' moves to price in a possible three rate hikes in 2017 after the Fed's policy statement and rate rise last week was a catalyst for dollar strength.

"She didn't use the opportunity to take the market back from being overly hawkish," said UBS currency strategist Constantin Bolz, in Zurich. "Maybe there were some people who...thought they would hold off from further dollar longs until she spoke, in case she were to row back."

The dollar rose almost half a percent against a basket of major currencies to 103.65 .DXY, its strongest since January 2003.

The euro fell half a percent to $1.0352 EUR=, once again opening up the door to a move to parity with the dollar.

The greenback was also within sight of a 10-1/2-month high of 118.66 yen touched last week, at 118.24 yen.

Expectations that U.S. President-elect Donald Trump's administration will go ahead with tax cuts and fiscal spending, leading to higher U.S. growth and inflation, have lifted U.S. bond yields and the dollar in the past six weeks, in what has become known as the Trumpflation trade.

"The market is still playing this prospect of (policy) normalization and, as long as this is the case, the dollar will remain strong or even appreciate a little further," said Commerzbank currency strategist Thu Lan Nguyen, in Frankfurt.

Analysts said the yen was the most obvious play against the dollar in the Trumpflation trade because the Bank of Japan is the central bank that looks furthest away from normalizing its policy settings.

The BOJ on Tuesday affirmed its twin targets of minus 0.10 percent interest on some excess reserves and a zero percent 10-year government bond yield.