Euro hits lowest in three weeks as dollar gains from trade optimism

The euro edged down to hit a new three-week low against the dollar on Friday as the U.S. currency shone on news that China and the United States had agreed to cancel some tariffs as part of a potential preliminary pact to end their trade war.

The two countries have agreed to roll back tariffs on each others' goods in a "phase one" trade deal if it is completed, officials from both sides said on Thursday.

Sentiment is likely to remain supportive for the dollar, equities and other risky assets as a de-escalation in the U.S.-China trade war removes a huge risk to the global economic outlook.

However, there is still some scepticism about a trade deal as officials inside and outside the White House have bristled at the notion of giving up punitive tariffs.

Muddying the waters further, White House spokeswoman Stephanie Grisham told Fox News Channel on Thursday that the United States is "very, very optimistic" about reaching a trade deal with China soon.

"When the trade war was looking like it was worsening, people were buying dollars as a safe haven. Now that the trade war seems to be winding down, people are buying dollars because the U.S. economy will benefit," said Marshall Gittler, strategist at ACLS Global.

"The market's attitude towards the euro is just plain negative right now," he said, adding that he expects the risk sentiment to wind down "unless or until the U.S. administration chimes in with some confirmation" that the tariffs will be rolled back.

The euro fell 0.2% to $1.1028, its lowest since Oct. 15.

The prospects of an end to the U.S.-China trade war left the safe-haven yen nursing losses against most major currencies.

Versus the dollar, the yen was near a five-month low and against the Australian dollar the Japanese currency was close to a 15-week low.

Progress in resolving the 16-month-long trade war also supported China's yuan. In the offshore market, the yuan traded at 6.9834 per dollar, close to a three-month high it jumped to on Thursday. The yuan was set for its sixth straight weekly gain.

Analysts from Bank of America Merrill Lynch, however, see the optimism for the U.S. currency fading eventually.

"For the dollar to weaken back to its long-term equilibrium, we need better global data and to get better global data, we need trade deals," they said in a note to clients.

"We remain optimistic and continue expecting the dollar to gradually weaken next year, as we put trade tensions behind (us) and the outlook of the global economy improves," they said.

Traders will be watching for the University of Michigan consumer survey in the United States, due at 1500 GMT. Economists polled by Reuters expect the survey to inch slightly higher to 95.9 in November from 95.5 in October.

The pound traded just below $1.28, close to the lowest since Oct. 24 and on course for a 1% decline this week.

The Bank of England has so far resisted following the U.S. Federal Reserve and the European Central Bank in cutting its main interest rate, but the outcome of Thursday's meeting suggests the UK central bank is poised to change its stance.