The safe-haven yen also gained versus the dollar, benefiting from the overall market anxiety. The Japanese currency was on track to post its largest weekly percentage rise against the greenback in 10 months.
US President Donald Trump on Friday threatened a "very long" government shutdown just hours ahead of a midnight deadline, calling on the Senate to pass spending legislation that includes his $5 billion demand for border wall funding.
While the news has not pressured US stocks overall, so-called defensive shares have gained, suggesting some nervousness about the general market environment.
"It's not clear at this stage whether President Trump would agree to a continuing resolution to temporarily fund the government, or would instead seek a government shutdown, which would go into effect at midnight tonight," said Nick Bennenbroek, currency strategist at Wells Fargo Securities in New York.
He added that if the shutdown goes into effect, he expects the dollar to continue its bounce next week.
US economic reports on Friday, meanwhile, were mixed and had minimal impact on the dollar.
Data showed orders for nondefense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.6 percent last month after an upwardly revised 0.5 percent increase in October.
The US economy also slowed slightly more than previously estimated in the third quarter, and momentum appears to have moderated further in the fourth, according to the Commerce Department.
Data also indicated that US consumer spending increased solidly in November, as households bought motor vehicles and spent more on utilities, but wage growth remained moderate, suggesting the current pace of consumption was unlikely to be sustained.
The so-called core PCE price index, the Fed's preferred inflation measure, rose to 1.9 percent year-on-year, from an eight-month low of 1.8 percent in October.
"With economic growth strong, helped by a pickup in consumption growth, and core inflation close to the 2 percent target, there appears to be little in the incoming data that would prompt the Fed to halt raising rates imminently," said Michael Pearce, senior US economist at Capital Economics in New York.
In late morning trading, the dollar index rose 0.5 percent to 96.759.
The euro, the largest component of the dollar index, fell 0.4 percent versus the dollar to $1.1392.
As liquidity thinned ahead of the Christmas and New Year holidays, large currency options had an impact on the cash market. For instance, large options around the $1.15 level also pulled the euro lower.
The dollar, meanwhile, slipped 0.1 percent versus the yen to 111.21 yen.