The dollar dropped against the euro and yen on Friday as the market shrugged off positive US economic data and stayed focused on the record US current account deficit. The dollar initially ticked higher against the euro but soon reversed course and fell immediately after the University of Michigan said its preliminary US consumer sentiment index rose to 95.5 in November from 91.7 in October. The November reading beat the market's expectation for a reading of 93.0.
"That does not change the market's concerns about the US current account deficit and the perceptions that US officials view a weaker dollar as a means to correct the significant deficit," said Alex Beuzelin, foreign exchange market analyst with Ruesch International in Washington.
Earlier in the morning, a government report showed US retail sales in October grew 0.2 percent compared with a upwardly revised 1.6 percent increase in September. Economists had expected an increase of 0.2 percent in October.
Sophia Drossos, currency strategist with Morgan Stanley in New York, said the data, while "an underlying positive for the economy", had little impact on the "dollar, which is just trading on policy issues right now."
"The market really is ignoring the economic news out of the United States and not really paying attention to relative growth and interest rate differentials," she added.
The euro was at $1.2929, up around 0.2 percent on the day, and within a cent of its record high of $1.3005 hit Wednesday.
The dollar was at 84.08 against an index of currencies, a little above recent nine-year lows.
The dollar fell to 105.80 yen, less than half a yen away from seven-month lows and down 0.7 percent in the session.
Analysts said that speculation China may move earlier than first thought to make its foreign exchange regime more flexible also supported the yen.
China's currency, the yuan, is closely pegged at around 8.28 per dollar. Many analysts believe that a loosening of the peg would cause the yuan and other Asian currencies to appreciate.
Speculation this week in US and Japanese newspapers that the US government will tolerate a weaker dollar gave a boost to Japan's currency on Friday, while "jawboning" by euro zone policymakers has slowed, but not stopped, the euro's rise.
In Japan, data showed the economy grew a real 0.1 percent in July-September from the previous quarter. That was below economists' forecasts for growth of 0.5 percent.
The yen fell on the news but quickly reversed losses, finding support from a report in the Nikkei Financial Daily that Washington was set to accept a weaker dollar to cushion the economic impact from tighter monetary and fiscal policies and reduce the current account deficit.
The front-page article gave no sources for its conclusion, and analysts sought more details on the author before lending it credence. But the article said the dollar would need to fall by up to 20-30 percent in order to halve the ratio of the US current account deficit to gross domestic product.