The dollar edged higher against the euro and Swiss franc Friday, marginally supported by improving money market conditions that helped ease the impact of generally bleak U.S. economic data.
Reports showing a small increase in consumer spending, tame inflation pressure and a drop in U.S. consumer confidence boosted the view that the Federal Reserve will cut interest rates further to boost a weakening economy.
That initially put the dollar under mild pressure, as lower interest rates diminish the appeal of U.S. assets. But the selling was short-lived.
Analysts said the market was cheered by news that the interbank cost of borrowing short-term sterling, euro and dollar funds fell. Banks are starting to anticipate slightly easier funding conditions in the second quarter of the year, which begins next week.
"Ultimately, what the currency market is watching is the fact that Libor rates are falling, suggesting slightly easier funding conditions," said Kathy Lien, chief currency strategist at DailyFX.com in New York. "The hope is that as the quarter-end passes, we won't have as much of a liquidity problem as we've had in the past."
The euro was down slightly versus the dollar, still within striking distance of last week's historic peak at $1.5904. Against the yen, the euro slipped.
Traders also took profits on earlier euro gains ahead of the weekend, helping the dollar recoup its losses.
Against the yen, the dollar was little changed.
The dollar's modest gains have reignited a broad sell-off in commodities, with U.S. crude oil futures down 1.6 percent to $105.82 per barrel and gold trading at $933.60 per ounce, below levels late Thursday.
A weaker U.S. currency makes dollar-denominated commodities cheaper for holders of other currencies and, in the case of gold, often lifts bullion demand.
The euro got a boost earlier in the global session when European Central Bank governing council member Axel Weber said euro zone price pressures remained alarmingly high.
He spoke after data from four German states pointed to a likely inflation pick-up in the euro zone's biggest economy, bolstering market views that the ECB is not likely to cut interest rates soon.
The diverging interest rate paths and signs the euro zone, at least for now, is proving resilient to a U.S.-led economic slowdown helped push the euro to record highs last week.
With gains of over 8 percent since the start of the year, the currency is still on track for its best quarterly performance since late 2004, and analysts say further gains toward $1.60 could well occur.
Overall, dollar sentiment is likely to remain bearish heading into a data-packed week that includes the release of the U.S. non-farm payrolls report and manufacturing and services data for March.
DailyFX.com's Lien said the dollar's modest gain Friday "is just the calm before next week's slew of U.S. data."
In a note to clients on Friday, Lehman Brothers strategists said "as long as growth data stay weak and housing keeps falling, more Fed cuts seem likely. G10 monetary policy divergence remains in the near term, which will test rate support for the dollar."