The US dollar fell against the euro as the common currency got a lift from the European Union and Britain striking a long-awaited Brexit deal.
Britain clinched an eleventh-hour deal on its exit from the EU, more than three years after Britons voted in a referendum to leave the bloc.
However, Prime Minister Boris Johnson still faces a knife-edge vote in parliament to get it approved.
While uncertainty remains on whether the pact will be ratified by British lawmakers, news of the agreement was enough to boost the euro 0.5% against the dollar and 0.66% against the British pound.
"The fact that we have a deal means that we are further from a hard Brexit and all eyes will shift to this weekend's vote," Brad Bechtel, global head of FX at Jefferies, said in a note.
The development in the Brexit saga marks a welcome respite for the euro which has dropped more than 3% this year.
Investor sentiment towards the single currency has been hurt by a broad economic slowdown in Europe driven by the protracted US-China trade dispute.
The German government said it lowered its 2020 forecast for economic growth to 1.0% from 1.5% previously, but added that Europe's largest economy was not facing a crisis.
🇪🇺🤝🇬🇧 Where there is a will, there is a #deal - we have one! It's a fair and balanced agreement for the EU and the UK and it is testament to our commitment to find solutions. I recommend that #EUCO endorses this deal. pic.twitter.com/7AfKyCZ6k9
— Jean-Claude Juncker (@JunckerEU) October 17, 2019
News of the deal sent sterling surging to a five-month high and within a whisker of $1.30 before retreating sharply as traders worried that British Prime Minister Boris Johnson might fail to get lawmakers to support the Brexit plan, plunging the country into another round of uncertainty.
Sterling was 0.18% lower at $1.2807.
The dollar has come under pressure this week, shedding about 0.6% against a basket of currencies.
The greenback, which fell on Wednesday after weak US retail sales data supported the case for further interest rate cuts by the Federal Reserve, extended its weakness today.
Sterling setback
Gearoid Keegan of Investec Treasury said the setback for sterling was reflective of the receding hopes for the deal getting through parliament in London.
"Early jubilation following Jean Claude Juncker's announcement that a deal had been agreed didn’t last long, and most of the headlines since then have been negative. Starting with the DUP, but quickly followed by the Labour party, SNP, Lib Dems and even the Brexit party’s Nigel Farage, it has quickly become clear that Boris would have difficulty getting the parliamentary arithmetic to add up to the 320 seats he requires to get the deal passed."
John Finn, Managing Director of Treasury Solutions, pointed out that, notwithstanding the drop in sterling today, the optimism around a deal is keeping the pound closer to the 85 pence mark.
"A defeat on Saturday will see it back towards 89p quickly. That would possibly see a general election thereafter and the polls suggest a Tory win, which would allow Boris to drive through this deal by January. If there is no deal approval and no election, then sterling will weaken again as the uncertainty continues."
He concluded that it was a good time for exporters to do some hedging of their currency risk.
Additional reporting by Brian Finn
