NEW YORK (Reuters) - The dollar dropped to a nearly three-week low against a basket of major currencies on Tuesday, pressured by lower Treasury yields, while sterling soared after Prime Minister Theresa May called for an early general election.
U.S. Treasury yields fell as nervousness ahead of France’s first round of presidential elections this weekend and ongoing geopolitical tensions boosted demand for safe-haven U.S. debt.
"We still think the dollar is going to strengthen over time based on the outlook for U.S. monetary policy... but for now, with markets not heavily focussed on monetary policy, it could explain this consolidation (for the greenback)," said Eric Viloria, currency strategist at Wells Fargo.
The U.S. dollar index lost 0.45 percent to 99.842. It touched its lowest since March 29 at 99.799.
Concerns about North Korea and the French presidential elections also kept a lid on the dollar against the yen - traditionally a haven for capital in times of political and economic stress - which has surged in the past two weeks.
Investors are watching ongoing U.S.-Japan economic talks for signs of the direction U.S. trade policy could take under President Donald Trump, who campaigned on a protectionist platform and has complained of countries artificially weakening their currencies.
The dollar gained overnight against the yen on comments by U.S. Treasury Secretary Steven Mnuchin that were seen favouring long-term dollar strength. But it turned lower to trade down 0.16 percent at 108.73 yen.
Sterling surged to its highest level since early December, up 1.5 percent at $1.2753 after May made a surprise call for an early general election to be held on June 8.
Analysts said markets were taking the move as a positive as polls show May likely to win the election, and a victory could strengthen her party's majority in government ahead of Brexit negotiations.
"That could reduce some of the political noise," said Wells Fargo's Viloria.
The euro was 0.5 percent higher at $1.0695, having moved little on Monday, when many European markets were shut for the Easter holiday.
Weaker prices for iron ore continued to weigh on the Australian dollar, which fell 0.6 percent to $0.7539 after rising to a two-week high on Monday above $0.7600 on upbeat Chinese growth data.
Additional reporting by Saqib Iqbal Ahmed; Editing by Dan Grebler