The dollar had been on the back foot before the news report as the Bank of Japans move to trim its purchases of long-dated government bonds (JGB) earlier this week reverberated across currency markets.
The dollars biggest losses were against the Japanese yen, falling more than 1.2 percent to a six-week low of 111.3, its weakest since late November.
If the [largest] foreign holder of U.S. Treasuries were to suddenly stop, that would cause a problem, said MUFG chief macro strategist Derek Halpenny, in London, referring to China. The dollar needs to weaken to a level that attracts buyers back to the U.S.
Against a basket of currencies, the dollar fell 0.6 percent, its biggest drop in a month.
Wednesdays decline against the yen followed Tuesdays 0.5 percent fall when Japans central bank reduced the amount of its JGB purchases in its regular buying operations.
The dollar has had a torrid start to the year after weakening around 10 percent against a basket of major currencies last year as the economic outlook in other parts of the world, particularly Europe, improved, while expectations of a major boost to U.S. growth from domestic tax reforms fizzled.
The dollars weakness also underlines the greenbacks vulnerability to other central banks moves towards normalising monetary policy, a feature of 2017 that has continued to weigh on the dollar in the opening weeks of the year.
Two U.S. interest rate hikes this year are priced in but the market has only recently started to price in tightening moves by other central banks.
Traders cited the report on Chinas appetite for U.S. bonds for a renewed rise in U.S. Treasury yields during European trade, with the U.S. 10-year bond yield rising to a new 10-month high at 2.593 percent.