The dollar drifted down versus the euro on Friday, pressured by the contrast between Thursday's weak US jobs and manufacturing data and forecast-beating growth figures from the euro zone. The US data injected a hint of doubt into market expectations that the Federal Reserve's aggressive cycle of interest rate cuts is over.
Further clues on the depth of the US economic slowdown will come on Friday from April housing starts and building permits numbers at 1230 GMT and the May Reuters/University of Michigan consumer sentiment index at 1355 GMT. All three measures are seen weaker.
By contrast, Thursday's strong first-quarter growth figures from Germany and France boosted the euro as they highlighted the relative strength of the European economy compared with the United States. The dollar also slipped versus the yen after Japanese data showed growth of 0.8 percent in the first three months of this year, above market expectations for a 0.6 percent increase.
Credit Suisse currency strategist Adam Myers said that while there were rising expectations that Europe's economy would slow, the problems in the US were far from over.
"I'm very much in the camp where I think the dollar will probably weaken further from here. Europe is not going to be anywhere as badly affected with a continuing slowdown in the real economy as the US is," he said. "Europe will slow down but its slowdown is not going to have the same impact on financial markets and lending and therefore consumers than it will in the US."
By 1032 GMT the euro was 0.1 percent higher at $1.5470. Against the yen the euro rose to 162.04 yen. The dollar was flat at 104.75 yen, having earlier fallen to 104.16. The dollar index, which tracks the greenback's performance against a basket of major currencies was a touch weaker at 73.298, trimming earlier losses. The index hit a two-month high of 73.895 last week thanks to steady gains in US stocks, rising US bond yields and a growing view that the worst of the credit crisis may be over.
However, the improved confidence in the US economy has taken a slight knock this week with a smaller than expected rise in US consumer prices. Data on Thursday showed the number of workers claiming unemployment benefit hit a four-year high while factory activity was weak in the US mid-Atlantic and in New York state.
"(Friday's) US economic news is unlikely to offer much better news; April housing starts and building permits are set to remain weak whilst Michigan confidence will fall further despite already dropping to multi-year lows," Calyon said in a note. "The market interest to re-establish positions in EUR/USD remains limited at present. Nonetheless, weaker data today could see euro push back towards the top of the range towards $1.56."
Elsewhere, Iceland's central bank struck a deal with its counterparts in Sweden, Norway and Denmark allowing it to buy euros with Icelandic crowns, giving the island's beleaguered currency a strong boost. The crown surged 4.5 percent against the euro. Analysts said the bank was thought to be talking to other central banks about possible further measures.