LONDON: The dollar fell to a 10-month low on Tuesday, bearing the brunt of a selloff triggered by another setback to U.S. President Donald Trump's agenda and scaled-back expectations for another rate hike at Federal Reserve this year.
The announcement overnight that two Republican senators would not support the latest version of the healthcare bill - had led to speculation that the reform proposal was likely to be withdrawn.
It fed into a belief that Trump's tax cuts and spending plans will come to nought.
The dollar index against a basket of major currencies sank to its lowest since last September with euro rising above US$1.15 against the greenback for the first time since May 2016.
In Asian hours, the Australian dollar surged more than 1 percent after minutes from the central bank's last policy meeting showed it turning more upbeat on the economic outlook.
"The reform momentum of the Trump administration has received another blow," said strategists at Morgan Stanley led by Hans Redeker, in a note to clients.
The strategists, however, added that the "Goldilocks" scenario for the United States - loose monetary policy along with relatively healthy economic growth - was likely to continue.
Expectations for the Fed hiking interest rates this year have been pushed back to the fourth quarter, the latest Reuters poll of more than 100 economists showed. A poll conducted last month predicted the Fed would raise rates by September.
"Clearly anything that comes along at the moment just corroborates the market's negative attitude on the dollar," said Neil Mellor, senior FX strategist with Bank of New York Mellon in London.
"There's just not enough inflation at the moment. And anything like this (defeat for Trump) is liable to push it lower."
Expectations for a rate hike at the Bank of England were also dented, hurting sterling, as British inflation unexpectedly slowed for the first time since last October. The drop in the pound helped the exporter-heavy FTSE 100 recoup earlier losses and trade higher on the day.
Elsewhere in Europe, stocks struggled with European shares off 0.4 percent as a set of disappointing results from the likes of Ericsson and Lufthansa soured the mood.
Regional stocks have rushed back into the limelight this year as foreign investors have piled in on the back of receding political risks, upbeat earnings and an economic recovery gaining traction.
Bullish bets on euro zone equities were named as one of three top crowded trades in the latest Bank of America-Merrill Lynch global fund managers survey, leaving them most vulnerable to earnings disappointments or signs of central bank tightening.
The MSCI All-Country World index was little changed while U.S. stock futures were off 0.1 percent.
Tempered expectations for Trump's spending plans weighed on European bond yields which edged lower, tracking U.S. equivalents, after the collapse of the second healthcare bill.
U.S. 10-year bond yields fell after the news, while German 10-year yields dipped 2 basis points to 0.57 percent when European trading started on Tuesday.
Yields across the globe rose sharply after Trump won the U.S. election in November on promises for tax reforms and infrastructure investment that were expected to boost growth and inflation in the world's largest economy.
In commodity markets, oil prices steadied as expectations of firm demand, particularly from China, was met ample supply.
Brent crude futures eased 0.1 percent to US$48.35 a barrel while U.S. crude oil fell 0.2 percent to US$45.93.
(Reporting by Vikram Subhedar, additional reporting by Patrick Graham; Editing by Jeremy Gaunt and Richard Balmforth)