By Geoffrey Smith

Investing.com -- The dollar weakened in early trade on Wednesday in Europe, amid confusion over the Bank of England's willingness to carry on supporting a U.K. bond market that has emerged as a key pressure point in the global financial sector.

By 03:30 ET (07:30 GMT), the dollar index, which tracks the greenback against a basket of six advanced economy currencies, was down 0.1% at 113.15, edging lower as some traders bet on the Bank of England being forced to extend its outright bond purchases past its self-imposed deadline of Friday.

Bank of England Governor Andrew Bailey had said on Tuesday - with unusual candor - that pension funds had three days to sort out their current positions, sending the pound sharply lower. However, it recovered most of its losses after the Financial Times reported that Bank officials had privately briefed City bankers that it may after all extend that deadline.

The confusion left GBP/USD at $1.1021, up half a percent from late Tuesday in the U.S., but with the market on a knife-edge as it awaits more clarity.

Data showing that the U.K. economy shrank in August hardly helped the mood, with developments in manufacturing, services and construction all worse than expected during the month.

"What we are seeing in real time in the U.K. is a decades-long hyper-financialization of the economy being partly unwound on fast-forward at gunpoint; and/or a trigger for a multi-decade market hyper-crash on fast-forward; or both," said Michael Every, global macro-strategist with Rabobank in a note to clients. He warned that there was "more to boot if you extend your view wider."

Simon French, chief economist with Panmure Gordon, tweeted that Bailey's comments did nothing more, in essence, than repeat the Bank's press release from a day earlier. That had set out a switch from outright purchases of Gilts to lending operations that have a more manageable impact on the money supply, and consequently on inflation.

Elsewhere, the EUR/USD struggled to make headway, edging up 0.1% to $0.9712 after Bank of France Governor Francois Villeroy de Galhau appeared to leave some room for doubt about the European Central Bank's ability to keep up with the pace of U.S. interest rate hikes.

Villeroy said it was too early to say whether the ECB should raise its key rates by 50 or 75 basis points when it meets on October 27th, a week before the Federal Reserve's next meeting. Villeroy also said the bank's refinancing rate should be at its neutral level -- or "a bit less than 2%" -- before the end of the year, which would allow ECB room to shrink its balance sheet.