We propose two algorithms involving the relaxation of either the given Dirichlet data or the prescribed Neumann data on the over-specified boundary in the case of the alternating iterative algorithm of Kozlov et al. (USSR Comput Math Math Phys 31 (1991), 45-52) applied to the Cauchy problem for the two-dimensional modified Helmholtz equation. The two mixed, well-posed and direct problems corresponding to every iteration of the numerical procedure are solved using the method of fundamental solutions (MFS), in conjunction with the Tikhonov regularization method. For each direct problem considered, the optimal value of the regularization parameter is selected according to the generalized cross-validation criterion. The iterative MFS algorithms with relaxation are tested for Cauchy problems associated with the modified Helmholtz equation in two-dimensional geometries to confirm the numerical convergence, stability, accuracy and computational efficiency of the method.