The dollar fell against a basket of peer currencies on Tuesday following reports of progress in peace talks between Russia and Ukraine, giving a lift to the euro and reducing the safe-haven appeal of the greenback.
Russia promised at peace talks in Istanbul on Tuesday to scale down its military operations around Kyiv and northern Ukraine, while Ukraine proposed adopting a neutral status but with international guarantees that it would be protected from attack.
The dollar, which had risen as much as 3.4% since Russia invaded Ukraine, declined 0.914% to 98.181, as traders looked to currencies deemed riskier.
"Risk appetite is back and I think you're seeing potentially a major turning point in the war in Ukraine as Russia signals talks have been constructive and there's hope that there could be a ceasefire," said Edward Moya, senior analyst at Oanda.
The euro was up 1.13% at $1.111, having earlier hit its highest level since March 17.
Any step toward a ceasefire or potential peace deal in Ukraine would support the euro as Europe is seen suffering a significant economic blow from the conflict, which began with Russia's invasion on Feb. 24.
The greenback tumbled 1.19% against the yen, which is set for its biggest monthly rise since November 2016, to 122.45 yen. The Japanese currency had fallen to its lowest level since 2015 on Monday.
Japanese Finance Minister Shunichi Suzuki said the government would closely watch currency moves to prevent a "bad" weak yen that hurts the economy.
"While the comments from Japanese officials overnight are unlikely to reverse the yen weakening trend on their own, they should at least help to slow the recent fast pace of yen selling," Lee Hardman, currency and emerging market analyst at MUFG, said in a note to clients.
The Bank of Japan on Tuesday continued to defend a key yield cap by offering to buy unlimited amounts of 10-year government bonds, which will likely keep the yen on its back foot.
"The divergence between the U.S. and Japan's monetary policy will continue to weigh on the yen, which we expect to stabilize at around 125 versus the dollar and probably even beyond that level," said Roberto Mialich, a forex strategist at Unicredit.
"Our view on the greenback remains positive due to the Federal Reserve's hawkish stance," he said.
China's offshore yuan dipped 0.18% to 6.3745 against the greenback after new pandemic restrictions in Shanghai. It hit its lowest since October 2021 at 6.4106 in mid-March.
Shanghai, China's most populous city, tightened the first phase of a two-stage COVID-19 lockdown, asking residents to stay indoors.
In cryptocurrencies, bitcoin was up 1.49% at $48,013 after hitting its highest level since late December on Monday.Ether, the world's second-largest cryptocurrency, was up 3.66% at $3,456.