The dollar perked up on Friday, rebounding from a seven-week low on optimism over the US economic outlook and corporate earnings, while the Mexican peso fell after the White House floated the idea of a 20 percent tax on Mexican goods to pay for a border wall.
The dollar index, which measures the greenback against six major peers, gained 0.2 per cent to 100.57. The index had recovered overnight to hit 100.73, after dipping to a seven-week low of 99.793.
“The dollar was helped by rising US Treasury yields and strong equities,” said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ.
“Trump has signed several executive orders since his inauguration, showing continuity from his campaign days, so the markets expect him to go ahead with the fiscal stimulus as well,” Uchida added.
While US equities and Treasury yields have extended their gains in the past week, fuelled by a positive US economic outlook and President Donald Trump's signals of new public spending, concerns over potentially new trade barriers have weighed on the dollar in the last two weeks.
The dollar index is on track to lose 0.2 percent this week. It has weakened for two consecutive weeks since the beginning of this year.
Investors were also concerned about Trump's plans to construct a U.S.-Mexican border wall to stem illegal immigration.
The White House said on Thursday that Trump proposed a new 20 percent tax on goods from Mexico to pay for the wall.
The Mexican peso fell 0.6 per cent against the dollar following the news, and stepped back from Thursday's three-week high of 20.8645. It last stood at 21.35.
“The tax on Mexican imports will undermine consumer purchasing power and could eventually cast a shadow on the U.S. economy,” said Makoto Noji, senior strategist at SMBC Nikko Securities.
“A protectionist stance adding to tensions between trade partners will not be positive for stocks and the dollar in the long term,” Noji said.
The dollar gained 0.4 percent against the yen to 114.96 yen . The greenback rose to a high of 115.04 yen earlier on Friday after the Bank of Japan announced an increase in five- to ten-year Japanese Government bonds purchases and helped bring down yields from 11-month highs
The BOJ's move added to the widening of U.S.-Japan interest rate differentials which has boosted the dollar since the U.S. election.
The US 10-year Treasury yield last stood at 2.515 per cent , while the 10-year JGB yield was at 0.070 per cent , down 1.5 basis points on the day.
The yen showed limited response to a slightly better-than-expected reading in Japan's consumer price index (CPI) data. The core CPI fell 0.2 per cent from a year earlier in December, less than economists' forecast of a 0.3 per cent fall.
The euro last stood at $1.0679 against the greenback, not far from Thursday's low of $1.0658.
The euro was on track to lose 0.2 per cent this week, after gaining for two consecutive weeks since the start of the year.
Investors' focus is now on US fourth-quarter gross domestic product estimates due later in the day.
Sterling was fetching $1.2582, and is on track to gain 1.8 per cent for the week. It gained 5 per cent in two weeks, recovering from a three-month low of $1.1983 hit on January 16.
British Prime Minister Theresa May will be the first foreign leader to meet the new US President later in the day. May called on Trump to renew the “special relationship,” expecting a rapid trade deal and close economic ties between the two countries.