The dollar hovered around a two-month high on Friday, set for a fifth consecutive week of gains in the longest winning streak for 15 months, buoyed by demand for safer assets on worries over China's economy and bets U.S. interest rates will stay high.
The People's Bank of China (PBOC) set a much-stronger-than-expected daily fixing, lifting the yuan from a 9-month low hit on Thursday, while sterling fell after British retail sales weakened more than expected in July.
The yuan fell 0.13% against the dollar to 7.3098 in offshore trading, bouncing back from Thursday's nine-month lows, after the PBOC set the official mid-point at 7.2006, more than 1,000 pips stronger than Reuters' estimate.
China's economic troubles have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court, and concerns also growing over default risks in its shadow banking sector.
China's securities regulator unveiled a package of measures aimed at reviving a sinking stock market, but investors said they would do little to boost confidence if the economy remains sluggish.
Beijing has so far disappointed with stimulus, while the PBOC cut rates earlier this week in a surprise move that widened the yield gap against the U.S., rendering the yuan even more vulnerable to decline.
"Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment," said Francesco Pesole, FX strategist at ING.
"High yields and growing risks in China suggests the balance of risks is moderately tilted to the upside for the dollar," he added.
The U.S. dollar index, which measures the currency against six peers, edged 0.1% higher at 103.53, after touching a two-month high at 103.59 on Thursday. For the week, it is set to gain 0.6%.
Minutes from the Federal Reserve's last meeting showed this week that most members of the rate-setting committee continued to see "significant upside risks to inflation," suggesting a bias toward further rate increases.
Strong economic data this week, particularly retail sales, had already bolstered the case for additional tightening.
STERLING SLIDES
Elsewhere, sterling fell 0.2% against the euro to 85.51 pence after British retailers reported a bigger-than-expected drop in sales in July as heavy rain put off shoppers who are also feeling the hit from high inflation and 14 back-to-back increases in interest rates.
It touched a five-week high of 85.24 pence against the single currency on Thursday.
The euro edged 0.1% lower at $1.0861, after touching on Thursday a six-week low of $1.0856.
ING'S Pesole said the single currency has been surprisingly resilient given the euro zone's economic exposure to China.
INTERVENTION RISK
The recent depreciation of the yen kept traders on edge against the risk of intervention by Japan's authorities.
Against the yen, the dollar eased 0.3% to 145.38, after reaching a nine-month peak of 146.56 on Thursday.
In autumn of last year, the dollar's surge beyond 145 triggered the first yen buying intervention from Japanese authorities in a generation.
The Australian dollar, which often trades as a proxy for China and has tended to track the yuan in recent days, fell 0.2% to $0.6387, after hitting a nine-month low of $0.6365 on Thursday.
Meanwhile, the world's biggest cryptocurrency, bitcoin , slipped 0.9% to $26,400 after dipping to a fresh two-month low at $26,172, adding to a more than 7% plunge on Thursday, as a wave of risk off sentiment grips world markets.