The dollar rebounded from a one-year low against the euro on Friday as waning risk appetite cut demand for higher-yielding currencies and boosted safe-haven demand for the greenback.

Sterling declined across the board, hitting a near five-month low euro on renewed concerns about the UK banking sector.

The dollar has sold off sharply this month as investors shifted into riskier assets on increasing signs the global economy is recovering. The prospect of low US yields and concerns about the US fiscal deficit fueled dollar selling.

But the currency gained a respite on Friday as investors trimmed their positions ahead of holidays in Japan and Singapore next week, although the trend for broad dollar weakness was seen as likely to persist.

'Today overall has been a retracement day and a profit-taking day,' said Andrew Busch, a global FX strategist at BMO Capital Markets in Chicago. '(But) I don't see anything on the horizon just yet that would take us out of this sell-the-US dollar mode.'

With no US data to lend direction, currencies are taking their cues from equity and commodity markets. World equities came under pressure after scaling an 11-month peak as investors took stock of recent hefty gains, although Wall Street ended higher in a choppy session.

'I still think that currencies are at the mercy of the stock market,' said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

In late New York trading, the euro fell 0.3 per cent to $1.4701. It hit a one-year high on Thursday and has risen 2.6 per cent so far this month.

The dollar index, which measures the dollar's value against a basket of six major currencies, rose 0.4 per cent to 76.500, having bounced off Thursday's one-year low of 76.010.

Sterling slumps

The yen fell after Japanese Finance Minister Hirohisa Fujii said he did not want to be perceived as backing a strong yen.

The dollar was last up 0.4 per cent at 91.38 yen, having rebounded from a seven-month low hit on Wednesday.

For the week, the euro rose 0.7 per cent against the dollar.

The US currency gained 1.1 per cent against the yen, the first week of gains in six trading weeks. The dollar index was 0.2 per cent lower on the week.

Sterling fell 1.2 per cent to $1.6245 after news that the UK government had set tougher-than-expected conditions for the potential exit of Lloyds Banking Group from a state-run arrangement to protect its assets, which underlined the fragility of UK banks.

Lloyds said on Friday it was weighing alternatives to the arrangement to insure it against credit losses.

The euro rose 1 per cent to 90.51 pence, after hitting a session high of 90.57 yen, the highest level since late April. – Reuters