The development on the tense Korean peninsula sent the struggling dollar down half a percent against a basket of its rivals to the day's lows, buoyed European stocks and US stock futures higher, and nudged bond yields upwards.

With few Brexit-related headlines out on Tuesday, sterling climbed 0.4 percent against the greenback on the Korea news as currency markets awaited draft guidelines on Wednesday on what the European Union would like to see in a trade agreement with Britain after the country leaves the bloc in 2019.

"The North Korea headlines were the catalyst for the risk rally in markets and that has pulled sterling up," said Viraj Patel, an FX strategist at ING in London.

After the return of a South Korean delegation from the North where it met leader Kim Jong Un, Seoul said on Tuesday that Pyongyang was willing to hold talks with the United States on denuclearisation and would suspend nuclear tests while those discussions are under way.

The pound rallied 0.4 percent to the day's highs of $1.3910. Earlier in the session, it fell 0.1 percent to $1.3835.

But gains were limited against the euro, with the British currency broadly flat at 89.17 pence.

While many analysts are bullish on the pound if a Brexit transition deal can be secured, uncertainty ahead of an EU summit later this month, at which Britain has said it expects to sign a deal, has kept a lid on sterling bulls.

Prime Minister Theresa May's Brexit speech on Friday sought to convince the EU that it is in its interests to show flexibility in deciding the shape of the relationship with Britain after its exit, but markets did not perceive sufficient signs of progress in the talks.