The dollar was last down 0.6% versus a basket of currencies, mirroring improved risk sentiment across equity markets, with European shares up for a second straight day.
Sterling also rallied, even as traders awaited news on the health condition of British Prime Minister Boris Johnson, who is fighting worsening coronavirus symptoms in intensive care.
Analysts said that while news of Johnson's condition was clearly a concern, beyond a dip in Asian hours it had not yet moved the pound as it was unlikely to mean a change in the government's policy direction to fight the virus. Sterling was last up 0.7%.
The dollar was down 0.3% against the yen as Japanese Prime Minister Shinzo Abe declared a state of emergency for parts of the country on Tuesday to counter the spread of coronavirus.
"CORRECTION FROM EXAGGERATED SELLING"
The euro rose 0.7%, last trading at $1.08650.
"We've got a nice decline in volatility across forex and equity markets. We know central banks have done a very good job in alleviating the strain in dollar markets and that's feeding through," said Kenneth Broux, FX strategist at Societe Generale.
"We need some time for this to settle... I think what we are seeing is a bit of reversion - a correction from exaggerating selling. We are in that process."
Dollar borrowing costs in swap markets have retreated, with swap rates against the euro and pound falling to their lowest levels in more than a decade this week.
Oil also rose on Tuesday amid hope that oil producers will agree to cut output in the face of crushed demand due to the coronavirus pandemic.
Commodities-exposed currencies including the Norwegian crown, Australian dollar and South African rand rallied particularly strongly, all up more than 1% on the day.
Those currencies were battered last month when investors dumped them for the safety of the U.S. dollar.
The Reserve Bank of Australia kept policy on hold at a meeting overnight after it already slashed interest rates and embarked on quantitative easing.
"With evidence continuing to build that the lockdowns are proving effective at slowing the spread of COVID-19, market participants' focus is beginning to shift to when and how the lockdowns could be eased," analysts at MUFG said in a note.
(Reporting by Iain Withers Editing by Gareth Jones) ((Iain.firstname.lastname@example.org))