The dollar fell broadly on Friday and was set for its biggest weekly drop in more than three months, dragged lower by weak U.S. economic data, while sterling was slightly below its highest level since June 2018, hit Wednesday after Britain's parliament rejected a "no-deal" exit from the European Union.
U.S. manufacturing output fell for a second straight month in February and factory activity in New York state was weaker than expected this month, offering further evidence of a sharp slowdown in economic growth early in the first quarter.
Friday's reports extended the streak of weak economic data and underscored the Federal Reserve's "patient" stance toward further interest rate increases this year. Fed officials are scheduled to meet next Tuesday and Wednesday to assess the economy and deliberate on the future course of monetary policy. The U.S. central bank raised rates four times last year.
"Data today on factory growth and the Empire State index also underwhelmed. Consequently, the Fed next week is likely to keep in wait-and-see mode on interest rates, a cautious stance thats checked the dollars rise," said Joe Manimbo, senior market analyst at Western Union Business Solutions.
While no change in rates is expected next week after the Fed paused a multi-year rate-hiking cycle in January, officials might strike a more cautious view on the outlook for the global economy after a volatile week in currency markets.
The pound paused for breath but stayed on course for its biggest weekly gain in seven weeks on growing expectations that Britain will not crash out of the EU without a deal on March 29.
Sterling last traded at $1.3283, below Wednesday's nine-month high of $1.3380 but up 2 percent so far this week, the biggest such gain since late January after the UK parliament voted to seek a delay in Britain's exit from the EU, following a decision to avert a no-deal Brexit.
"The market has some reassurance that the chances of a no-deal Brexit are very low, which is the reason why the currency market has taken this news as a positive. These votes have removed the worst-case scenario," said Ugo Lancioni, head of global currency at Neuberger Berman in London.
The yen remained firm after the Bank of Japan kept monetary policy steady but tempered its optimism that robust exports and factory output will underpin growth, giving a boost to its perceived safe-haven status.