The dollar rose on Friday on position-squaring ahead of a weekend meeting of the world's richest nations, aided by solid if not spectacular US economic data.
Earlier in the week, the dollar had fallen to its lowest level since mid-July against the euro and sunk against other currencies, leaving the market ripe for some dollar buying ahead of the meeting of the Group of Seven industrialised nations convening in Washington this weekend.
"There's been some unwinding of positions ahead of the meeting," said Meg Browne, currency strategist at HSBC in New York.
Dealers said they do not expect the G7 to make a major statement on currencies and in fact most expect the focus of the meeting to be on soaring oil prices, not foreign exchange.
"I think the G7 wants to keep the status quo. I would be surprised if the language is different from what we had at Boca Raton," said Hugh Walsh, vice president of foreign exchange at Fortis Bank in New York, referring to the site of the G7's last meeting, in February.
Still, after the G7 upset the dollar a year ago with a call for greater currency flexibility, the market is wary of any pressure on Asian countries to allow their currencies to appreciate to help correct the US current account deficit.
China reiterated on Friday it would move toward a flexible foreign exchange rate, but offered no new specifics on timing in a joint statement with US officials.
Central bank governor Zhou Xiaochuan told Reuters "it's not that simple" to move the yuan's peg to the dollar this year, and said China needs to lay more groundwork for foreign exchange flexibility and that US officials understood this.
The yuan is pegged at around 8.28 per dollar. Any loosening of that peg would likely cause the Chinese currency to rise and could push the dollar broadly lower, notably against the yen and other Asian currencies.
"There is probably some position squaring going on before the G7 communique, but my feeling is there probably won't be any Chinese revaluation" of the yuan arising from the meeting, said Scott Schultz, a trader at Brown Brothers Harriman in New York. China is a special guest at the G7 meeting.
In mid-afternoon US trade, the euro traded down 0.2 percent to $1.2404. The dollar was up 0.4 percent to 110.43 yen and gained 0.3 percent to 1.2502 Swiss francs. Meanwhile, sterling was down 0.7 percent to $1.7981.
Dealers said US economic data that was solid but not robust lent modest support to the dollar.
The Institute for Supply Management's manufacturing index slipped to 58.5 from 59.0 in August, but it was above expectations for a drop to 58.0.
"I think it's a reasonably solid number, especially when compared to some other numbers in other parts of the world," said Robert Sinche, head of currency strategy at Bank of America in New York. "These are terrific levels to be buying dollars, especially against the euro."
The University of Michigan's consumer sentiment survey showed a surprise dip in September, falling to 94.2 from 95.9. Forecasts had called for the index to climb to 96.0.
Earlier sterling came under fire, dropping 1 percent on the dollar and hitting an eight-month low against the euro after weaker than expected manufacturing data threw a further dampener on expectations for higher UK interest rates.
Dealers said that once the G7 meeting is out of the way, the market's focus would turn to US payrolls data for September, which are due for release next Friday.
Economists polled by Reuters forecast a rise in non-farm payrolls of 148,000 in September.
The European Central Bank, the Bank of England and the Reserve Bank of Australia all meet next week to decide interest rate policy. None is expected to raise rates.
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