The dollar fell on Friday from its three-week highs in the previous session, as traders' focus shifted to the Federal Reserve's policy meeting next week when the U.S. central bank is expected to leave interest rates unchanged.
"While the Fed next week may not sound overtly dovish, its tone might emphasize caution and thus do little to alter very low expectations for policymakers to raise rates this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The Fed raised interest rates four times last year and has signaled it will probably lift borrowing costs twice in 2019, though some central bank officials have said they will be patient in raising rates.
The dollar index was down 0.85 percent at 95.78, after climbing to a three-week high of 96.676 on Thursday.
The dollar's decline also coincided with a rally in U.S. stocks, which were bolstered by upbeat earnings.
The euro, on the other hand, rebounded on Friday, steadying after a dovish European Central Bank President Mario Draghi failed to alter an already downbeat assessment on the euro zone's economy. Draghi warned on Thursday that a dip in the euro zone's economy could be more pronounced than thought a few weeks ago, comments seen as signaling a delay in the bank's first interest rate hike.
The euro on Thursday weakened broadly on those comments and fell to a two-month low of $1.1286 against the dollar. But on Friday, the single currency recovered, rising 0.95 percent to $1.1412.
"A relatively dovish performance from Draghi was already priced in," said John Hardy, head of FX strategy at Saxo Bank.
Markets are pricing in an ECB interest rate rise only for mid-2020 as the euro zone economy is suffering its biggest slowdown in more than half a decade, with no recovery in sight.
Indeed, a key German business morale indicator fell for the fifth straight month in January.
The euro has traded in a range of $1.12 to $1.16 for the past three months, and analysts expect it to underperform in the near term as monetary policy is expected to remain accommodative for now.
Sterling reached an 11-week high on Friday after a report in the Sun newspaper that Northern Ireland's Democratic Unionist Party had privately decided to offer conditional backing for British Prime Minister Theresa May's Brexit deal next week.
The report pushed the pound 0.4 percent higher to $1.3139, its highest level since Nov. 9. Sterling has risen about 1.8 percent this week, moving above $1.30 to the dollar on hopes Britain will avoid a no-deal Brexit on March 29.