The dollar was little changed against the euro on Friday in a seesaw session that saw it trade mixed against the single European zone currency in thin volume. The dollar initially fell on University of Michigan consumer sentiment data, which reinforced the view that US economic growth is slowing.
But the greenback then reversed those losses as investors focused on inflationary expectations that rose to the highest since October. The dollar was down against the yen after China raised interest rates in an effort to tame a boom in credit and investment. "The initial reaction was people looked at the headline number and the expectation and the dollar went lower," said Ron Simpson, managing director of currency analysis at Action Economics in Tampa, Florida. "But then it dawned on people that inflation is still going to be a focus going forward."
The data were in contrast to government figures released earlier in the week, which showed inflation pressures moderating in July and depressed the dollar. In late afternoon trading, the euro was near flat at $1.2825, although it moved well above a session low of $1.2781 on electronic trading system EBS.
Some credited the euro's swings during the day with investors squaring positions before the weekend following a heavy week of data, said Michael Jansen, currency strategist at the National Australia Bank in New York.
The yen recovered from record lows against the euro, after China raised key interest rates by 27 basis points, though it was also off the day's highs as the trading day progressed.
Traders speculated that China's rate rise, its second in four months, could precede other measures to curb China's overheating economy, including a freer yuan. The yen often is traded as a proxy for the yuan because it is Asia's most liquid currency and Japan has close trade ties with China. The euro was down 0.1 percent on the day against the yen at 148.55 yen. The dollar was last down 0.1 percent against the yen at 115.79 yen.
Some analysts expected the yen's gains to be fleeting. If interest rate rises and other administrative measures taken by China succeed in slowing its economy, pressure on the yuan to appreciate may even ease, some said.
"We've seen a kneejerk move driven by people using the yen as a surrogate to go long on the yuan," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "But it's unlikely to change the overall trend of yen-selling."
The dollar gained against other currencies, however, as speculators trimmed positions ahead of the weekend, paring back their bets in favour of the euro and sterling, which recently rose to record levels.
"The market has been gorging itself on foreign currencies and is suffering from indigestion," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York.
Sterling dipped and remained lower after news passengers on a flight operated by a British low-cost airline had been evacuated after a bomb scare. Police said the scare appeared to be a false alarm. Sterling was down 0.2 percent at $1.8816. The dollar is set to end this week slightly lower against a basket of major currencies.
The tame inflation data earlier in the week and a series of reports suggesting the economy is cooling have raised speculation the Fed will leave its key rate on hold again at its September meeting after standing pat at 5.25 percent last month following 17 straight rate hikes. In contrast, other central banks including the European Central Bank look poised to raise interest rates in the coming months, reducing the dollar's allure.
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