Stocks rose and investors' rush into safe-haven assets such as U.S. Treasury debt slowed, temporarily undermining the dollar's appeal and lifting other currencies such as the euro.
The low-yielding yen also fell as the pendulum swung back in favor of currencies and assets that offer a higher return.
The impetus for Wednesday's moves was news the White House and Congressional Democrats had reached a deal in principle on a $15 billion plan to help automakers restructure and avoid bankruptcy For details, see [ID:nN10505833].
"It's safe to say risk appetite has improved somewhat, and that has a lot to do with talk of an imminent bailout for the U.S. auto industry," said Omer Esiner, chief market analyst at Ruesch International in Washington.
With the year winding down, Esiner also said investors are taking profits on the dollar's recent rise. That has added to pressure on the U.S. currency and may persist into January.
Late afternoon, the euro was up 0.8 percent at $1.3022
Analysts were quick to point out, however, that the uncertainties facing the global economy meant a relapse into risk aversion was still likely.
One sign of just how parlous the economic outlook is came when China said its exports and imports shrank unexpectedly in November, sparking fears that global demand has vanished. [ID:nPEK31604]
In the United States, while an auto deal looked set to pass the House of Representatives, some Republicans sowed doubts about possible snags in the Senate [ID:nWEN162].
That weakened stock markets and helped the dollar and yen pare some of the losses seen earlier in the session, though both remained down on the day.
In the longer run, though, analysts expect the dollar's rise to fade next year as markets stabilize and investors stop seeking relative safety in the U.S. currency.
"If you analyze why the dollar has strengthened, it has more to do with the rest of the world than with the U.S.," said Mohamed El-Erian, co-chief of Pacific Investment Management Co, at a Reuters Investment Summit in New York on Wednesday.
The euro and sterling, for instance, fell sharply as the euro zone and British economies slowed and their central banks cut interest rates.
He said when "that stock adjustment is over, which we believe will be in 2009, the dollar (will fall)" but added that it's still premature to bet against the greenback.
"You don't want to be 'shorting' the dollar until you have evidence the de-leveraging has run its course. Our sense is that ... three-fourths of the de-leveraging has taken place." (Additional reporting by Nick Olivari; Editing by Chizu Nomiyama)
