The euro wallowed near a nine-year low on Friday on growing expectations that the European Central Bank will embark on quantitative easing, while the dollar held firm before US jobs data that could cement the case for a rate hike by the Federal Reserve.
ECB President Mario Draghi said the bank's Governing Council stands ready to take unconventional measures if needed to stem a prolonged period of low inflation, fuelling expectations of a policy move later this month.
The euro stood at $1.1806, having hit a nine-year low $1.1754 on Thursday as traders grew more convinced that the ECB might start buying euro zone sovereign debt. The currency was down 5.3 per cent in the past four weeks, the biggest such fall since May 2012.
"We note that (Wednesday's) daily close below the 2010 low at $1.1877 has amplified bearish sentiment, with the resulting breakout targeting the 2005 low at $1.1640 as the next major support target," George Davis, chief technical analyst at RBC Dominion Securities in Toronto, said in a note to client.
Soft euro zone economic data this week only cemented expectations of an early ECB action.
German industrial orders
German industrial orders suffered an unexpected slump in November, data showed on Thursday, a day after price data confirmed the euro zone slipped into deflation.
In addition, concern that a January 25 Greek general election would lead to a stand-off between Berlin and Athens over austerity policies imposed on Greece provided another reason for investors to steer clear of the euro.
On the other hand, the dollar was broadly firm as investors look for a solid increase in US employment, with the dollar index, now at 92.211, coming within sight of its 2005 peak of 92.630.
"The dollar index is likely to rise beyond the 2005 peak. But to rise well beyond the peak, we will likely need to see further widening in yield gaps (between the dollar and other currencies," said Minori Uchida, chief FX strategist at Bank of Tokyo-Mitsubishi UFJ.
Against the yen, the dollar stood at 119.53 yen, extending its recovery from a low of 118.05 hit on Tuesday.
US payrolls data
Investors expect the US payrolls data due later on Friday to post a solid increase of 240,000 in December, after surprisingly strong gains of 321,000 in November.
Despite recent improvements in the job market, the Fed has said it will be patient in raising rates as inflation is expected to be subdued.
Fed's patient approach
Boston Fed President Eric Rosengren, speaking on Thursday, highlighted the Fed's cautious stance, saying the Fed can likely be patient not only on the timing of the first interest rate hike but on the series of subsequent hikes.
Still any signs of a pick-up in wage increases could heighten speculation of earlier action, with some analysts noting the importance of average hourly earning data that comes with the jobs report.
Earnings rose 0.4 per cent in November, the strongest in almost a year and a half. Another rise of 0.3 to 0.4 per cent could change the perception, likely damaging many emerging market currencies, Steven Englander, global head of G10 foreign exchange strategy at CitiFX in New York, said.
"The biggest jolt to the market would be to see a second month of AHE gains... we have not had an 0.7 percent gain over a two-month period since 2008, so it would count as a breakout," he said.
Sterling at near 18-month low
Sterling stayed near an 18-month low on Thursday, as it suffered from a mix of broad dollar strength, weaker UK growth prospects and political uncertainty. The pound traded at $1.5091 near Thursday's low of $1.5034.
As expected, the Bank of England kept its benchmark interest rate at its all-time low of 0.5 per cent, where it has remained since 2009. The BoE is now expected to keep it there until next year - a stark change from six months ago, when many were betting on a rise before the end of 2014.