The greenback index's eight-day winning run came to an end overnight to push it away from a two-month peak.
The New Zealand dollar was the stand-out performer in early Wednesday trading, adding more than 1.5 percent after a less dovish than expected central bank announcement.
The trade dispute between the world's two biggest economies has hung over global markets since mid-2018, and any sign of a credible detente has tended to boost sentiment.
U.S. President Donald Trump said on Tuesday that he could see letting the March 1 deadline for reaching a trade agreement with China "slide for a little while," if the two sides were close to a complete deal.
Officials in Washington and Beijing are having a round of talks this week to try and hammer out an agreement.
That, together with a deal to avert another partial U.S. government shutdown, sent equity markets soaring and supported riskier currencies.
"There is optimism in the market and you could argue that is why people no longer want to buy the dollar and want to try some risk," said Jane Foley, currencies strategist at Rabobank.
Foley, however, noted that the euro/dollar exchange rate had remained stuck in a "choppy range" in recent months because of a fundamental deterioration in the economic outlook in both the U.S. and the euro zone - uncertainty that could support more dollar upside.
"There is a lot of evidence that global growth is slowing and a lot of evidence to be suspicious of an end to the U.S.-China trade war. There will still be a long way to go," she added.
The dollar index rose 0.1 percent to 96.811, while against the euro it rose 0.1 percent to $1.1315.
"We seem to have moved away from dollar dominance over the last two sessions," said Michael McCarthy, chief markets strategist at CMC Markets.
The day's big mover was the New Zealand dollar, which rallied as much as 1.7 percent to $0.6852 after the Reserve Bank of New Zealand sounded less dovish on policy than markets had expected, forcing a round of heavy short covering.
The Australian dollar, a barometer for global risk assets, added 0.3 percent to $0.7120. The dollar rose versus the yen to 110.72.