The dollar fell close to two-year lows on Monday as renewed hopes for a Brexit deal and U.S. coronavirus relief plan, as well as progress on COVID-19 vaccines, lifted riskier currencies.
The pound gained after the UK and European Union agreed on Sunday to continue Brexit talks and the EU's chief negotiator said a deal was still possible.
"The pound has basically reversed all of its losses from last week, and I think that's just helping the risk on sentiment," said Vassili Serebriakov, an FX strategist at UBS in New York.
The pound was last up 1.16% versus the dollar, at $1.3375 - a jump from its low point of $1.3133 on Friday. Versus the euro, it was last at .9089 pence with the euro down 0.71% on the day. .
"The reality here is that neither side, especially the EU, wants to be seen as walking away from negotiations and sparking a no deal Brexit," Scotiabank FX strategists wrote in a note to clients.
Wall Street's main indexes opened higher on Monday as travel stocks surged on the launch of a nationwide COVID-19 vaccine campaign, while Alexion Pharmaceuticals jumped following a bumper buyout offer from Britain's AstraZeneca.
The dollar was last down 0.24% against a basket of currencies at 90.544, after earlier dropping to 90.419, the lowest since April 2018.
A $908 billion bipartisan COVID-19 relief plan, which could be introduced in the U.S. Congress as early as Monday, will be split into two packages, a person briefed on the matter said.
U.S. dollar net short positioning in the latest week climbed to its highest since late September, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
In another development on Monday, the Bank of Israel bought "hundreds of millions" of dollars during an intervention in the foreign exchange market in a bid to contain the shekel's appreciation, a market source told Reuters.
The shekel stands at a 12-1/2-year peak of 3.257 per dollar after gaining more than 6% in 2020. The central bank has bought some $17 billion of foreign currency so far this year -- with $1.9 billion coming in November.
The risky Australian and New Zealand dollars were also up, with the New Zealand dollar reaching its strongest since April 2018 at 0.712.
The Aussie - a liquid proxy for risk - was last up 0.33% versus the dollar at 0.7560.
The euro rose around 0.42% versus the dollar, at $1.2159. New coronavirus restrictions on activity in Europe - including a strict lockdown in Germany - had limited market impact.
Elsewhere, China's yuan rose against the dollar as market participants shrugged off an attempt by the Chinese central bank to stem yuan appreciation by reducing capital inflows.
At 1223 GMT, the dollar was down around 0.2% on the day versus the offshore yuan, at 6.5251.
For the week ahead, market participants will focus on a series of central bank meetings, including the U.S. Federal Reserve on Wednesday and the Bank of England on Thursday.
"There is going to be a lot to digest," said UBS' Serebriakov.