NEW YORK - The dollar posted a full recovery from early weakness against the euro Friday after renewed speculation that the European Central Bank could cut interest rates next week.
In a volatile session marked by huge swings in both directions, the dollar rebounded against the yen after touching a five-week low of 105.57 yen.
The dollar recouped its losses in New York trading after a couple of major banks, including Barclays Capital, forecast rate cuts by the ECB.
Data released out of the euro zone Friday reinforced such expectations, with the Ifo survey of German business sentiment falling to 95.4 in March from 96.4 the month before.
The results prompted Hans-Werner Sinn, president of the German Ifo institute, to say in an interview on CNBC that "the time has come to cut interest rates in Europe."
ECB board member Gertrude Tumpel-Gugerell said that while rates are very low, the central bank would cut them if necessary.
However, traders said market moves were exaggerated by thin trading conditions ahead of the weekend and the quarter end. The back-and-forth action resulted in swings of over two cents in the pound and one cent in the euro.
John McCarthy, director of foreign exchange at ING Capital Markets, said the ECB rate cut speculation is "more of a catalyst for continued liquidation of deep-in-the-money euro positions."
While he doesn't think the dollar's longer-term downtrend has necessarily ended, the euro could be poised for a lower trading range centered around $1.2050.
The dollar's rebound was also helped by an unexpected improvement in consumer sentiment on the University of Michigan's final index reading for March, which rose to 95.8 from 94.1 in the preliminary estimate and 94.4 in February, according to people who had seen the report.
In late New York trading, the euro was quoted at $1.2123, down from $1.2137 late Thursday.
The dollar was quoted at 105.90 yen, down from 106.04 yen late Thursday.
The dollar was quoted at 1.2846 Swiss francs, up from 1.2791, and 1.3181 Canadian dollars, down from 1.3286. The British pound rose to $1.8149 from $1.8083.