The euro jumped more than a half cent on Friday after European Union leaders reached an agreement on migration, a thorny issue that has threatened EU unity and the fate of German Chancellor Angela Merkel.
Still, the dollar index is on course to make its first quarterly gain in six while the Chinese yuan looks set to post its biggest fall for a month as traders increasingly worry about the impact of Sino-US trade disputes.
The euro rose as high as $1.1650, extending its recovery from the one-week low of $1.15275 touched on Thursday, after EU leaders reached the deal on migration.
If unresolved, the row would have sent a damaging signal about EU unity at a time when the bloc is being assailed by US President Donald Trump on trade and struggling to deal with the legacy of its 2015 crisis, which saw more than one million refugees and migrants enter Europe.
It would have been especially dangerous for Merkel, the EU’s longest serving leader, who came under intense pressure from her conservative allies in Bavaria to deliver a deal on migration in Brussels.
The deal improved risk sentiment, undermining the yen while lifting growth-linked currencies such as the Australian dollar.
The yen fell 0.25 percent to 110.75 to the dollar while Australian dollar rose 0.3 percent to $0.7376.
The dollar index against a basket of six major currencies stood down 0.5 percent at 94.936 after having risen to as high as 95.534 on Thursday, a level last seen almost a year ago.
Despite Friday’s drop, the index was up 5.5 percent this quarter, its first rise since the final quarter of 2016.
The dollar’s gains partly stemmed from the prospects of rising US interest rates on the back of solid expansion in the US economy.
During the past week, the greenback was helped by repatriations ahead of the end of quarter and a half year.
But its overall strength, especially against many emerging currencies, is likely to reflect repatriation on increasing worries about US trade disputes, some traders also said.
One notable currency that has weakened against the dollar is China’s yuan, which fell to a 7 1/2-month low of 6.6441 on Friday.
It has lost 3.5 percent this month, surpassing the 2.7 percent fall seen in August 2015, when Beijing shocked markets by unexpectedly guiding the yuan sharply lower.
“We have Chinese economic data coming up tomorrow, one of the first readings after trade tensions have escalated. Chinese PMIs have been essentially flat for some time but if it shows a major deterioration, that could worsen sentiment,” said Kyosuke Suzuki, director of forex at Societe Generale, referring to the official manufacturing Purchasing Managers’ Index due on Saturday.
Caution about a further fall in the yuan was palpable in the options market.
The implied volatilities of the offshore yuan have risen over the past couple of weeks, with one-week volatility hitting a five-month high of 6.9 percent, double the levels of just two weeks ago.