The dollar rose against most currencies Monday in thin trading and held its gains even after President Barack Obama said a deal was in sight to avert a fiscal disaster that would have meant tax hikes and spending cuts for the world's largest economy.
The dollar could come under pressure if a compromise agreement on the U.S. budget encourages investors to buy riskier assets, driving flows away from the safe-haven and highly liquid greenback.
Obama said Monday, the deadline before the U.S. economy goes over the "fiscal cliff," a deal on the budget was within sight but was not complete yet.
His comments bolstered riskier currencies such as the Australian, New Zealand, and Canadian dollars.
"Even though, it's not definitive yet, overall it is hopeful," said Nick Bennenbroek, head of New York FX strategy, at Wells Fargo in New York.
"So long as Obama's statements are consistent with the idea that we are getting a deal, that is going to keep the market relatively calm. That should be positive for foreign currencies because of risk appetite and negative for the dollar as a safe-haven."
He pointed out that Obama's remarks had limited impact on the currency market only because some participants that could have traded on this news were out of the office.
The dollar index was up 0.2 percent at 79.80 in early afternoon trading. It was down 0.5 percent this year, falling after two straight years of gains.
Analysts said Congress could pass legislation in 2013 that retroactively prevents the United States going over the fiscal cliff, an option that is viewed as politically easier.
The euro was down slightly on the day at $1.319, with selling accelerated just before the London close. Near-term support was seen around $1.3142, the low set Dec. 17, according to Reuters data. Any euro gains would be capped at $1.3308, the 8-1/2 month high on Dec. 19, traders said.
The euro has gained 1.8 percent against the dollar this year, overcoming worries about a euro zone breakup and any sovereign debt defaults.
Sentiment toward the euro improved after the European Central Bank pledged to buy bonds of indebted peripheral countries. Positioning data showed speculators sharply reduced bets against the euro in the week ended Dec. 24.
Obama's statement helped boost the Australian dollar, which rose 0.3 percent to US$1.0398. The U.S. dollar fell 0.4 percent versus the Canadian unit to C$0.9933, while the New Zealand dollar rose 1 percent.
The yen continued its slide, with the dollar nearing a two-year peak against the Japanese currency due to expectations of more monetary easing by the Bank of Japan. The dollar hit a high of 86.79 yen, its strongest level since August 2010. It was last at 86.72, up 0.8 percent on the day.
The yen fell more than 11 percent in 2012, its worst yearly performance since 2005.
The euro was up 0.6 percent to 114.37 yen, below a 17-month high of 114.68 yen set Friday. The euro has risen 15 percent against the yen in 2012, its biggest yearly percentage gain since it was launched in 1999.
With a new Japanese government led by Prime Minister Shinzo Abe expected to pursue aggressive monetary easing and heavy fiscal spending to beat deflation, analysts see the yen staying under pressure in 2013. Any drop in the dollar against the yen would likely be limited.