The U.S. dollar fell against the euro on Tuesday as the common currency added to Monday's gains on a Franco-German proposal for a fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.
Encouraging results from the trial of a vaccine for COVID-19 reduced demand for safe havens and the greenback rose to a near one-month high against the Japanese yen. <JPY=EBS>.
Germany and France, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow 500 billion euros ($550 billion) on behalf of the whole EU. The Commission is expected to outline their proposal before a European summit scheduled for May 27.
The euro rose 0.08% against the greenback at $1.09235, on pace for a two-day gain of about 1 percent.
"The Franco-German proposal represents a material step forward towards harnessing joint fiscal capacity to provide sustained fiscal stimulus to support the economic recovery," said Lee Hardman, currency analyst at MUFG.
The common currency was also supported by a survey showing German investor sentiment improved much more than expected in May as concerns eased over the impact of the coronavirus pandemic on Europe's largest economy.
The greenback found little support from data showing U.S. homebuilding dropped by the most on record in April.
The dollar, which draws safe-haven flows when risk appetite falls, has softened as investors took heart from encouraging early-stage data for a potential coronavirus vaccine.
"The USD is a safe haven just like the CHF or JPY and it was safe havens under pressure from yesterday morning straight through to now," said Brad Bechtel, global head of FX at Jefferies.
Governments reducing restrictions has also helped investors grow optimistic that economies could soon return to normal.
On Tuesday, U.S. President Donald Trump said he will sign an executive order directing federal agencies to eliminate "unnecessary regulations that impede economic recovery."
The Australian <AUD=D3> and New Zealand dollars <NZD=D3> were stronger on the day amid progress on reopening the global economy and vaccine optimism.
Against the Japanese yen, which tends to draw investors during times of geopolitical or financial stress, the dollar rose 0.37% to a near one-month high.
(GRAPHIC: U.S. dollar gains on safe-haven yen as risk sentiment improves - https://fingfx.thomsonreuters.com/gfx/mkt/jznpnerjmvl/yen.jpg)
The pound <GBP=D3> rose 0.39% against the dollar, a small recovery relative to its recent seven-week lows. Sterling is held down by Brexit risks and speculation about negative rates.
(Reporting by Saqib Iqbal Ahmed; Additional reporting by Olga Cotaga in London; Editing by Dan Grebler)
