Carmakers led the rally in Japan, where the Nikkei Stock Average surged 3.5% to its highest level in a year.

Currency traders focused on Wednesday on the yen, which see-sawed as they weighed speculation about the future of Japanese Prime Minister Shigeru Ishiba against U.S. President Donald Trump's announcement of a trade deal with Japan.

Japan is facing trade and political uncertainty after a historic defeat for the prime minister’s ruling party. Shigeru Ishiba is trying to buy time for his premiership following this past weekend’s election, which left the ruling bloc three seats short of a majority in the upper house.

Japan and Europe are two of the U.S.’s largest trading partners and now that the markets have some certainty around trade, it’s back to “risk-on” for investors, according to Jim Reid’s team at Deutsche Bank.

The U.S. dollar strengthened against the Swiss franc and euro but weakened versus the yen on Wednesday as positive sentiment from a new U.S. trade deal was offset by political uncertainty surrounding Japanese Prime Minister Shigeru Ishiba's future.

While the announcement was cause for optimism ahead of Aug. 1, analysts remained concerned about the steep tariffs still looming for key trading partners such as Brazil and the EU.

Deal-signing at the German cloud computing and software giant SAP turned cautious in the second quarter, CFO Dominik Asam told CNBC.

The dollar rose against the euro due to U.S. trade talk progress but fell against the yen, influenced by Japan's interest rate prospects. Political uncertainty in Japan and upcoming ECB decisions also affected currency markets,