The euro hit a six-month peak and German stocks touched a record high on Tuesday as signals on further European integration contrasted with political turmoil and fresh doubts about the economy in the United States.
The euro's rally was reinforced by dollar losses prompted by allegations that US President Donald Trump disclosed highly classified information to Russia's foreign minister about a planned Islamic State operation.
That conspired with doubts over Trump's economic policy and a run of weak data to dampen expectations of a rate hike from the world's biggest economy next month.
Euro zone markets were meanwhile buoyed by talks between the bloc's main powers, Germany and France, which may open the door to changing treaties to facilitate ambitious reform. A robust first quarter growth report for the bloc gave a further boost.
Monday's talks between new French President Emmanuel Macron and German Chancellor Angela Merkel sought to reinvigorate a Europe shaken by Britain's planned exit, and spread hope that the populist upsurge epitomized by Macron's rival in the French election, Marine Le Pen, could be held at bay.
“Macron and Merkel seemed more aligned than I expected, with Merkel even saying she wouldn't exclude treaty changes, which the market welcomed,” Florian Hense, a senior economist at Berenberg, said.
“The axis between Germany and France is even more crucial over the next couple of years because if the two don't sit together and reform the euro zone, we are probably going to have Le Pen in five years' time again.”
The euro was comfortably the best performing G10 currency on Tuesday, up around 0.6 percent against a broadly weaker US dollar.
The dollar index -- which measures the greenback against six other major currencies -- was down around 0.4 percent on the day.
Analysts said the controversy around Trump has raised fears that he might not last a whole term and that, even if he did, there were too many distractions for him to be able to successfully push through his economic stimulus programme.
“(The story about Trump and Russia) probably is playing out as a weaker dollar on the view that Trump may not be around long enough to deliver his tax reform, which is at least partially priced into the dollar,” said RBC Capital Markets currency strategist Adam Cole, in London.
A weak manufacturing report also trimmed expectations of a Federal Reserve rate increase next month.
The New York Federal Reserve's barometer on business activity in the state unexpectedly fell in May, sinking into negative territory for the first time since October.
Expectations of a rate increase in June fell to 74 percent compared with 84 percent last week, according to the CME Fedwatch.
Oil rise
On stock markets, Germany's bourse nudged up slightly to better an all-time peak breached on Monday while Britain's commodity-heavy index was the main beneficiary of a steep rise in oil.
A broad index of Asian stocks also earlier nudged to a fresh two-year high on Tuesday.
Oil moved back towards a three-week high breached on Monday, after top producers Saudi Arabia, Russia and Kuwait supported prolonging supply cuts until the end of March 2018 in a bid to drain a global glut.
Brent crude oil was up 30 cents at $52.12 a barrel by 0750 GMT. US light crude CLc1 was 25 cents higher at $49.10 a barrel.
Brent crude has gained nearly 9 per cent over the last week though some analysts were sceptical about the durability of the rally despite the proposed supply curbs.
“That is going to be easier said than done, it appears, with US production running at its fastest pace since August 2015 and data yesterday confirming that Chinese growth momentum continues to moderate,” ANZ strategists wrote in a daily note.
A risk-on undertone meant meagre gains for gold, with the precious metal changing hands at $1,233 per ounce.