The dollar dropped below recent highs on Tuesday after a blow to Democratic spending plans in Washington, but worries about the Omicron coronaviruses variant kept risk currencies in check.
The dollar index, which measures the currency against six major peers, was last at 96.513, losing ground on both the euro and the yen.
After the U.S. Federal Reserve opened the door to as many as three interest rate increases in 2022, the greenback approached 16 month highs at 96.914 last week, and then found support as concerns about the Omicron strain caused investors to seek safety.
It pulled back on Monday, finishing the session down 0.12% after the U.S. Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden's hopes of passing a $1.75 trillion domestic investment bill known as Build Back Better, said on Sunday he would not support the package.
The dollar was back on track after the breakdown of Build Back Better. Kyle Rodda, analyst at IG markets said that the dollar was slightly lower because of less stimulus, weaker growth and rates dropping at the short-end.
Two-year U.S. Treasury yields touched 0.5870%, their lowest since December 3, causing the yield curve to steepen.
The pound was on the back foot at $1.3204 after British Prime Minister Boris Johnson said on Monday that he would tighten coronaviruses curbs to slow the spread of the Omicron variant if needed.
Omicron infections, which are multiplying rapidly across Europe and the United States, and doubling every two or three days in London and elsewhere, caused a sell-off in share markets on Monday as well as oil.
In a sign of the uncertainty, Nasdaq and S&P 500 futures both climbed in early Asia.
The Aussie dollar was weak at $0.71055, while the New Zealand dollar was testing 13 month lows at $0.6709.
Turkey's lira fell by 10% on Monday, before falling over 20% before ending the session, after President Tayyip Erdogan introduced a series of measures that would help the burden of the weakened currency on Turks.
He vowed to push on with a low-rates policy that led to the lira's slide in the first place.
After falling for the past few weeks, the price of digital currency was comparatively quiet, just below $47,000.
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