The euro's advance came as most global equity markets pushed higher, with US stocks again surging to fresh records as earnings season got underway amid optimism following tax reform.
Near 10:40pm, the euro was at $1.22, up 1.4 percent on news that Merkel's conservatives have reached a "breakthrough" deal with Germany's second biggest party, the Social Democrats, toward building a new coalition.
In the all-night negotiations in Berlin, Merkel and her Christian Democrats, Horst Seehofer of her Bavarian allies the CSU, and Social Democrats (SPD) chief Martin Schulz hammered out a 28-page paper that will form the basis for the talks ahead.
The euro "jumped to its highest level in three years as the improving political sentiment in Germany and the upbeat comments from the ECB yesterday are fuelling the rally," said market analyst David Madden at CMC Markets UK.
"Merkel is one of the biggest proponents of the eurozone project, and her ability to remain in power will be key to ensuring stability as we go forward," said IG analyst Joshua Mahony.
European bourses also finished higher, with Frankfurt rising 0.3 percent and Paris 0.5 percent.
In the US, meanwhile, investors continued to aggressively add to stock holdings. All three major US indices finished at records, with the broad-based S&P 500 winning 0.7 percent.