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Euro off 2-1/2-month low, fall in US yields hurts dollar

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The euro was back in familiar territory against the dollar on Friday, having staged a rebound from a 2-1/2-month trough as investors booked profits on bearish positions ahead of the weekend.

The common currency rose 0.1 percent to $1.3718. It had fallen as far as $1.3648 on Thursday, its lowest level since late February, in response to data showing the euro zone grew much less than expected at the start of the year.

The euro was down about 0.3 percent for the week at its current levels, putting it on track for its second straight weekly decline.

Read MoreEuro uptrend bullish amid ECB easing expectations

"EUR/USD rebounded from the lows thanks to the sharp drop in U.S. yields but we suspect that expectations of ECB easing will keep the euro trading with a bearish bias," analysts at BNP Paribas wrote in a note to clients.

Indeed, the euro has fallen roughly 2 percent since May 8 when European Central Bank (ECB) President Mario Draghi convinced markets that the bank was ready to inject fresh stimulus next month.

The disappointing growth figures on Thursday only served to fuel those dovish expectations.

The euro eased 0.1 percent to about 139.17 yen, not far from a 2-1/2-month low near 138.97 yen set on Thursday.

Read MoreEuro joins the currency war, sits near 3-month low

The dollar remained on the defensive versus the yen after taking a hit on Thursday, when U.S. benchmark 10-year Treasury yields fell to a six-month low of 2.473 percent, undermining the greenback's appeal.

The dollar eased 0.1 percent to 101.46 yen, staying close to a two-month low of 101.31 yen set on Thursday.

Below that trough, possible support for the dollar lies at levels near 101.20 yen, which roughly coincides with a few intraday lows touched in March as well as the dollar's 200-day moving average.

Read MoreUS inflation data test for dollar bulls

The greenback could come under renewed pressure versus the yen in the near term, if the U.S. 10-year bond yield falls further in the wake of its breach of a recent trading range, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

"If there is a clear break below 2.5 percent, a (dollar) drop to levels below 101.00 yen will come into sight," he said.

The U.S.10-year Treasury yield last stood at 2.491 percent.

With its drop this week, the U.S. 10-year Treasury yield has fallen below a trading range of roughly between 2.6 percent to 2.8 percent that had held since early February.

To be sure, dollar buying interest on dips is likely to help lend some support to the greenback, Okagawa said.

"Right now there are bids on the downside, so any fall (in the dollar) tends to be slow. But that doesn't mean we're in a situation where it is likely to rise," he added.

Japan's trade deficits are seen as a supportive factor for the dollar versus the yen over the medium term, as they suggest that net foreign exchange flows generated by the country's exports and imports are tilted toward yen-selling.

Read MoreDoes Japan's current account spell danger for the yen?

The drop in U.S. yields on Thursday caught some by surprise. Traders pointed to safety flows stemming from a sell-off in Greek bonds that halted a rally in peripheral euro zone debt.

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