For the past couple of years, it uses mintty (based on the same code as putty) as its default terminal. I find mintty to be a very fine terminal emulator and is easily configurable; its default colour for rendering ANSI Blue was too dark for my liking but I was able to change it to the same colour that xterm uses.

It supports UTF8, 256 colours; copy-pasting is simple and easy. I suppose the only mainstream feature it's lacking is tabs -- but that doesn't bother me.