- The US Congress will vote this week on a stopgap funding bill to provide more time for lawmakers to reach a deal on a bigger COVID-19 relief package.
SINGAPORE: Sterling on Tuesday clung to hopes of a meeting between British Prime Minister Boris Johnston and European Commission President Ursula von der Leyen salvaging a Brexit trade deal, while safe-harbour demand gave the dollar support as US virus cases rose.
The British currency was whipsawed as the prospects of Britain and the European Union striking a last-minute deal ebbed and flowed.
It shed as much as 1.5% overnight before recouping losses after the leaders' announced plans to meet in Brussels.
On Tuesday, sterling was on edge but holding on at $1.3353 early in the Asia session, well above Monday's low of $1.3225.
Other majors had dipped a fraction against the US dollar overnight with a broadly risk-averse mood, though dollar gains were muted as investors overwhelmingly consider it in a downtrend.
The yen held steady at 104.10 per dollar after inching a fraction higher on Monday and the euro was kept firmly above $1.21.
The pound's rebound - albeit with little actual sign of headway in Brexit negotiations - piles pressure on to the leaders' meeting to deliver a compromise before Britain's trade privileges with the European Union expire at the end of the month.
"The thought process is Boris is not going to Brussels to come back without a deal," said Chris Weston, head of research at Melbourne brokerage Pepperstone.
Failure to secure anything before Thursday's European Union summit could push the pound back to $1.30, he said, but is reckoning on joint concessions to get to an agreement.
"I'm quietly confident we get something tangible to work off at this meeting, which could cause some of the short covering of the no-deal hedges."
The premium of pound puts to calls has rocketed to its highest levels since April, more than doubling over the past two weeks, as traders hedge against a no-deal outcome.
Volatility gauges are also surging, with one-week implied volatility for the pound at its highest since March.
Against the euro, the pound touched a seven-week low overnight, before recovering to sit at 90.70 pence per euro.
Elsewhere, concern at surging coronavirus cases in the United States tempered optimism about vaccinations and fiscal support for the US economy and provided a bid for dollars.
Against a basket of currencies, the greenback edged higher to 90.890, about half a percent above the two-and-a-half-year low it plumbed on Friday. The Australian and New Zealand dollars took a breather and parked near recent peaks.
"Although we see the kiwi gradually grinding higher in time, getting gains may be a struggle in the short term as global events cast a shadow," ANZ Bank analysts said in a client note.
Anthony Fauci, the US government's top infectious disease expert, said mid January "can be a really dark time for us" if gatherings over the forthcoming holiday season spur even greater spread of the virus.
California has shut all but critical infrastructure and retail operations in its worst-hit areas as US COVID-19 infections are at their peak, with an average of 193,863 new cases reported each day over the past week.
The US Congress will vote this week on a stopgap funding bill to provide more time for lawmakers to reach a deal on a bigger COVID-19 relief package.
That could renew dollar selling by improving investors' appetite for riskier currencies, but after so many false dawns on the stimulus front traders were content to wait and see.
Later on Tuesday business sentiment surveys in Germany and the United States are due and will offer some sense of how deeply the latest wave of COVID-19 has hurt consumers' mood.