The dollar gave up a two-year high giving ground to the yuan and steadying against the euro
The British pound bounced on Wednesday in the wake of a parliamentary vote opening the door for another Brexit delay, while the dollar drifted lower after weak manufacturing data stoked wagers on aggressive US policy easing.
The greenback's doldrums helped the Australian dollar shine when June-quarter economic growth, while soft, was in line with forecasts, and the currency rose 0.3% to reach a one-week peak of $0.6775.
Sterling, pushed to a near three-year low on Wednesday, climbed almost 0.2% against the dollar to $1.2100 and firmed 0.1% against the euro.
"I think there's a real opportunity for the pound," said Nick Twidale, director at Sydney FX brokerage Xchange.
He said the rise was driven by British lawmakers voting to defy Prime Minister Boris Johnson to put a proposal delaying Britain's exit from the European Union beyond October on parliament's agenda on Wednesday.
"It now opens up the possibility again of, I suppose the extreme would be a no-Brexit, but a softer Brexit," Twidale said. "We'd priced in so much of a hard Brexit with Boris Johnson coming in, that I think there's a real opportunity for some sterling appreciation."
On Tuesday, sterling dropped under $1.20 and hit its lowest since a flash crash on October 2016 and the outlook is still pretty cloudy. Johnson has said he will now push for a snap election, which would add yet another major source of uncertainty.
The dollar gave up a two-year high touched on Wednesday against a basket of currencies to trade at 98.915, giving ground to the yuan and steadying against the euro, with one euro buying $1.0975.
The yen weakened slightly to 106.11 per dollar after a Bank of Japan board member said the central bank must pre-emptively ease monetary policy to fend off risks to the economy.
The dollar's pullback was prompted by manufacturing activity in the world's biggest economy contracting for the first time in three years last month, according to data from the Institute for Supply Management.
That knocked the wind out of a previously rising greenback and rallied the bond market as investors increased bets on a couple of Federal Reserve rate cuts before Christmas.
A 25-basis-point cut is now fully priced in, while yields on benchmark 10-year Treasuries, which fall when prices rise, dropped to their lowest in two years.
"The expectation that the Fed will come to the rescue has increased," said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.
"But it's not a capitulation on the dollar. It's just merely stopped the recent rise of the dollar."
The dollar's weakness help pulls the yuan from an 11-year low to reach 7.1669 per dollar. Its rise was tempered as traders kept a wary eye on trade risks, with US President Donald Trump promising a tougher line on Beijing if trade talks drag on.