The dollar was softer against riskier currencies on Tuesday on rising optimism that US lawmakers could agree on new stimulus to blunt the economic impact of the coronavirus.
Risk appetite also improved after US President Donald Trump left the hospital and returned to the White House following treatment for Covid-19, a development viewed as reducing political uncertainties in the near term.
"I think hopes of US stimulus are the main driving force," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
"As for Trump's discharge, the impact is not clear-cut but it is seen as positive for risk environment to the extent that there are less worries about the White House getting caught in complete chaos and unable to make decisions," he said.
The euro traded at $1.1792 EUR=, following a gain of 0.58% on Monday.
The pound changed hands at $1.2990 GBP=D4, tackling its resistance around $1.30, despite concerns about a no-deal Brexit.
The dollar advanced on the safe-haven yen to 105.66 yen JPY=, staying near its highest levels in three weeks.
The dollar's index against a basket of six major currencies =USD dropped to 93.381, touching its lowest level in two weeks.
US House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke by phone for about an hour on Monday on coronavirus economic relief and were preparing to talk again Tuesday, continuing their recent flurry of activity working towards a deal on legislation.
White House Chief of Staff Mark Meadows said there is still potential for an agreement among lawmakers in Washington on more economic relief, and that Trump is committed to getting the deal done.
However, renewed efforts in Congress to reach an agreement on relief funds for the pandemic-hit economy has been complicated by the spread of the coronavirus among key policy makers including Trump.
The president returned to the White House on Monday after a three-night hospital stay for Covid-19 treatment, though White House physician warned he may not be out of the woods yet.
"The market has been nervous about the possibility of a contested election, but it appears Biden is widening the lead, thus reducing the chance of markets not knowing the results for a long time," said Yujiro Goto, chief currency strategist at Nomura Securities.
"And while markets have thought there will be corporate tax hikes if Democrats sweep both chambers as well as the president .. that is being offset by the idea that there will be fiscal stimulus," he added.
A "blue wave" election outcome would likely accelerate dollar weakness, said Zach Pandl, co-head of global forex at Goldman Sachs in New York.
"The former vice president would likely take a more multilateral approach to foreign policy issues, and would be less likely to surprise markets with tariff increases," Pandl said, referring to Democrat presidential candidate Joe Biden.
In addition, a corporate tax hike would make US stocks less attractive, and fiscal stimulus tends to depreciate a currency when it comes with high unemployment and low interest rates, he added.
Among the currencies that are not included in the dollar index, the offshore Chinese yuan maintained its firmness at 6.7281 per dollar CNH=D4, having hit its highest level since April last year on Monday.
The Australian dollar jumped 0.3% to $0.7205 AUD=D4, after the Reserve Bank of Australia kept interest rates on hold at 0.25% despite widespread expectations of a rate cut.
Currency traders are also focused on the government's annual budget with Canberra widely expected to keep the fiscal tap open for years to come.