The euro recovered from an earlier three-week low against the dollar on Friday as pre-weekend position adjustment outweighed the negative impact of rate cut speculation while upbeat Japanese data boosted the yen.
The euro has been under pressure on talk the European Central Bank could cut rates as early as next week.
German Ifo business climate data fell more than expected in March, prompting think-tank president Hans-Werner Sinn to call for an immediate cut in European interest rates. But dealers said the euro had already fallen far enough this week.
European Central Bank executive board member Gertrude Tumpel-Gugerell kept rate cut talk on the boil, saying exchange rate developments in recent months have hindered the recovery.
"We've had quite a substantial move in euro/dollar this week so there is some profit-taking. The market still remains sensitive to changes in interest rates and expectations for rate changes," said Robert Bergqvist, chief analyst at SEB in Stockholm.
The yen hit a five-week high against the dollar after data showed spending by Japanese households rose for the fourth consecutive month in February and retail sales were also higher, suggesting Japan's export-led recovery might be trickling down to consumers.
"Things are looking quite good for Japan and we should see more improvement, which would attract foreign capital and create problems for the Japanese authorities," said Bergqvist.
By 1230 GMT the euro recovered to US$1.2170 after falling to a three-week low of US$1.2074 early in Europe. It also trimmed losses to 128.58 yen after hitting a four-month low of 127.61.
The dollar fell to a five-week low of 105.56 yen before trimming losses to 105.87. Tokyo traders reported yen-selling intervention by Japanese authorities at around the 105.70 level.
The Ifo business climate index fell for a second consecutive month to 95.4 in March from 96.4 a month ago, suggesting the recovery in the euro zone's biggest economy might be faltering.
Comments from ECB officials earlier this week heightened expectations of a near-term euro zone rate cut and knocked more than three cents off the euro.
Tumpel-Gugerell also said on Friday the ECB would react to the weak economy if needed, but later clarified her remarks to say she was talking about ECB policy in general, not referring to current policy.
Also on Friday, Ifo's Sinn also said a quarter point rate cut next week would boost confidence. The head of the German government's panel of economic advisors Wolfgang Wiegard said the risks to German recovery had grown and urged the ECB to cut rates.
These comments contrasted with hawkish remarks from Federal Reserve governors on Thursday. St. Louis Fed Governor William Poole and Fed Board Governor Donald Kohn said on Thursday that a future US interest rate rise was inevitable given recent indications of US economic growth.
The US has interest rates of 1.0 percent, and the euro zone of 2.0 percent.
Dealers said news an Air France flight was forced to land in Milan after a suspicious bag was found aboard briefly pushed the Swiss franc higher against the dollar and helped the euro reverse its losses. Air France later said the suspect package was a false alarm.
Switzerland's KOF leading indicator of business expectations came in weaker than expected at 0.51 in March, unchanged from a downwardly revised 0.51 in February.
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