The greenback bounced on Friday as concerns over delayed U.S. fiscal stimulus amid a surge in COVID-19 cases and the increasing likelihood that Britain will exit the European Union without a deal dented risk appetite.
Overnight, hopes of a global economic rebound and a fading pandemic in 2021 saw investors taking bets on riskier currencies linked to rising commodity prices such as the Australian and Canadian dollars,, both of which hit more than two year highs.
But sentiment worsened as investors turned attention back to the prospect of more business closures to stem the spread of COVID-19 and continued volatility from Brexit.
"This has been a disappointing week on many fronts," said Edward Moya, senior market analyst at OANDA in New York.
"There's been no progress on COVID aid relief talks in DC, we have Brexit, which is once again going to go down to the wire, and coronavirus deaths and hospitalizations are still at a staggering pace in the U.S. and it's likely to lead to more restrictive measures and lockdowns," Moya said.
Another 2,902 U.S. deaths were reported on Thursday, a day after a record 3,253 people died, a pace projected to continue for the next two to three months until a vaccine can be widely distributed.
But talks on a federal COVID-19 relief package have not been fruitful, and House Speaker Nancy Pelosi on Thursday raised the possibility of negotiations dragging on through Christmas.
Data on Friday showed that U.S. producer prices barely rose in November, supporting views that inflation would remain benign in the near term as the pandemic restrains the labor market and demand for services.
The dollar index against a basket of major currencies was last up 0.20% at 90.936. It is trading just above a two-and-a-half-year low of 90.471 reached on Dec. 4.
Sterling dipped 0.66% to $1.3211 and bets on further volatility in the currency grew as a disorderly Brexit appeared more likely.
Options market moves show traders bracing for chaos, with one-week implied volatility at a nine-month high and the premium of sterling puts to calls near its highest since April as investors pay for downside protection.
The euro also retreated against the dollar, losing 0.16% to $1.2122 after Thursday's gains, when the European Central Bank announced a new round of stimulus in line with market expectations. EU leaders also reached a compromise over a pandemic aid package.