The euro weakened to a seven-week low on Friday as lacklustre PMI data added to the broader market conviction that European central bank policymakers will maintain a loose monetary policy for the near future. Eurozone business activity remained lacklustre at the start of the year, a survey showed, a day after ECB rate-setters did not make any policy change, standing by their pledge to keep buying bonds and, if needed, cut interest rates until euro zone inflation headed back to their goal.

The data added to expectations that a rate hike is ruled out for the rest of the year, with Nordea analysts expecting a 10 bps increase only in the second quarter of 2023. Though there are no expectations for a rate hike from the US Federal Reserve as well for the rest of the year, the 160 bps plus interest rate differential in benchmark interest rates between the euro zone and United States is expected to drive the single currency lower.

Indeed, the euro is set for its worst start to the year in five years, down 1.5% so far this month, and trading at its lowest levels since Dec. 2 at $1.1031. "The euro is seeing renewed institutional selling since the start of the year with expectations that the Fed is probably on hold now while the ECB explores their options to add liquidity," said John Marley, a senior FX consultant at FX risk management specialist, SmartCurrencyBusiness.

It was near a five-week low against the British pound and 33-month low against the Swiss franc. Implied volatility on one-month euro/dollar exchange rates also drifted towards a record low of below 3.7%, yet another indicator of how low expectations are from investors of any change in European policy rates. "Some people were hoping that (ECB chief Christine) Lagarde could talk about the possibility of policy normalisation after Riksbank ended negative interest rates late last year. But there was absolutely no such indication from her," said Kazushige Kaida, head of foreign exchange at State Street Bank.

Riksbank, the central bank of Sweden, ended five years of negative interest rates last month, despite a slowdown in the Swedish economy. The dollar index rose 0.2% at 97.87 and was on track for a third consecutive week of gains. The Australian dollar traded at $0.6846, erasing the gains made after a strong jobs report the day before and heading for a fourth consecutive week of losses.