The dollar rallied on Friday, rebounding from a week of heavy selling against the euro, yen and other major currencies, and abetted by a batch of fairly upbeat US economic data.
Analysts said traders who had been positioned for more dollar weakness this week scrambled to cover short dollar positions ahead of the long US Memorial Day holiday weekend after generally firm economic data. Short positions are bets that a specific currency will fall.
"Today's move up in the dollar was a bit more of profit-taking from short-term accounts.
Overall, it is a strong close for the euro against the dollar this week above $1.2200, even though it gave back some of its gains today," said Russell LaScala, chief spot dealer at Deutsche Bank in New York.
"We have been in a pretty tight range for the past few weeks and yesterday the euro's break above $1.2180 was pretty significant for dollar weakness.
In the big picture, I think we may be out of the consolidating range and opening up a new dollar down-trend," LaScala said.
The dollar initially started to lose ground on weaker-than-expected consumer sentiment in the University of Michigan's final May report.
But the dollar was bolstered after the Chicago Purchasing Management index, a key gauge of business activity in the US Midwest, rose to 68.0 from April's reading of 63.9, above expectations of 61.0.
"Traders have been fighting the weaker dollar trend and there's some profit-taking going on in the euro, Swiss franc and commodity currencies," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York.
"Markets were anticipating weaker data to support their short dollar positions, but we had some strong numbers.
The Chicago PMI threw the markets for a loop and forced traders to scramble to cover their short dollars," he added. The euro fell 0.33 percent to $1.2224 and traded lower against the yen at 134.80, off 0.90 percent.
Deutsche's LaScala said the reweighting of global stock benchmarks set by Morgan Stanley Capital International was behind some of the euro's losses.
"The euro was dragged down from euro/yen selling.
A lot of real money accounts were selling euro/yen to reweight their balances. MSCI reweightings would mean money moving out of Europe and into Japan," he said.
The dollar fell to 110.26 yen, off 0.60 percent, pressured by gains in the Japanese stock market. The US currency rose 0.46 percent to 1.2510 Swiss francs. Sterling fell to $1.8329, off 0.26 percent.
The University of Michigan's final consumer sentiment reading for May was 90.2, undercutting economists' forecasts of an unchanged reading of 94.2.
The dollar firmed slightly after government data showed a rise in personal spending, but at the same time showed inflation tamer than expected.
While this did not change the view that the Federal Reserve will raise interest rates next month, it did temper concerns it would do so aggressively.
Markets are now focusing on next week's May employment data for more clues on how much and how quickly the central bank will raise the benchmark rate from a 46-year low of 1 percent.
The Dallas Federal Reserve said on Thursday that the need for short-term interest rates to rise eventually did not necessarily mean they should increase immediately or sharply.
Near record-high oil prices have also raised concerns that US economic growth could slow and delay a rate rise.
Oil prices closed below $40 a barrel on Friday, however, before an OPEC meeting next week where oil ministers are expected to consider a big increase in crude output limits.
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