Dollar weakens as Brexit deal boosts euro, sterling

The dollar fell sharply against the euro on Friday as the common currency jumped on hopes that a Brexit deal between Britain and the European Union could improve the odds of the euro zone avoiding a recession for now.

In one of the most striking flourishes of the three-year Brexit drama, British Prime Minister Boris Johnson confounded his opponents on Thursday by clinching a new deal with the EU, even though the bloc had promised it would never reopen a treaty it agreed last year.

The euro has been rattled this year by dismal manufacturing data and by worries that deepening economic tensions between the United States and China could slow euro zone economies even further.

But with Britain's Johnson and EU leaders agreeing a new deal for Britain to exit the bloc, and no recent bad news on the US-China trade front, the euro was getting a boost.

"While the results of tomorrow's vote is far from certain, we see the progress made over the past week as diminishing the chances of a no-deal Brexit," said John Doyle, vice president for dealing and trading at Tempus Inc in Washington.

"A no-deal Brexit would be devastating for the UK economy, but the ripple effects into the mainland would be substantial," Doyle said. "That has helped lift equity markets, regional currencies and put downward pressure on the greenback."

The euro was up 0.32% at $1.1158, a near two-month high.

The respite for the euro comes as US economic data have grown increasingly gloomy, a development that could see the US Federal Reserve cut interest rates later this month, its third rate cut this year.

Poor domestic data makes deeper cuts in US interest rates a touch more likely, Tempus' Doyle said.

The dollar index, which compares the dollar against six major currencies, was down 0.31%. For the week, the index was down 1%, its worst weekly performance in 17 weeks.

Money markets are pricing in an 82% chance of a rate cut at the Oct. 30 meeting, Refinitiv data show.

The pound was 0.45% higher against the dollar at $1.2946 on Friday, even as doubts remained about whether the proposed Brexit deal will get through the British parliament in Saturday's vote.

The yuan held steady against the dollar after data showed China's economy grew at the slowest pace in more than 27 years in the third quarter, owing to the trade war with the United States and weak factory production.