The dollar tends to move in the opposite direction to oil, and it took a hit on Thursday as oil jumped above $135 for the first time, fuelling concerns about the U.S. economy just as the Federal Reserve is expected to halt its run of interest rate cuts to bolster the country's growth.
The euro held its ground, partly because recent solid data from the euro zone's largest economy, Germany, nurtured speculation that the European Central Bank was more likely to raise rates than cut after keeping them at 4 percent this week.
The yen came under pressure as rising energy prices would also hurt Japan's growth, which is showing signs of softening.
The euro was little changed from late U.S. trade at $1.5731, after rising to a one-month high above $1.5800 on Thursday.
Solid stock markets may spur risk-taking and prompt investors into carry trades, where they use low-yielding currencies such as the yen to buy higher-yielding assets and currencies, undermining the yen, traders said.
The dollar was up nearly 0.1 percent at 104.14 yen, after slipping below 103 yen the previous day. Traders said the dollar was supported by buying from Japanese retail investors and importers but resistance was firm around 105 yen due to Japanese exporter selling.
The single currency was up 0.1 percent against the yen at 163.80 yen.
The rise in bond yields around the globe on inflation concerns also highlights how low Japanese interest rates are, further reducing incentives to buy yen, a dealer at a U.S. securities firm said.
The Bank of Japan kept interest rates steady at 0.5 percent earlier this week and is expected to hold them until global economic prospects become clearer. BOJ Governor Masaaki Shirakawa said the downside risks to the global economy remained high.
U.S. crude
Earlier this week, the Fed downgraded its 2008 U.S. economic growth forecast and raised its inflation outlook.
The Fed has cut interest rates to 2 percent from 5.25 percent since September, but markets now expect the central bank to hold steady and possibly raise rates by the end of the year.
Traders said they were waiting for a U.S. report on existing home sales due on Friday for clues on the dollar's direction.
Technicals
EUR/USD
Eased back from 1.5800/14 high as daily tools unwind overbought readings. Pullback has since found support at the 1.5681/1.5700 area though scope is seen for deeper drop. Below to see additional support at 1.5600/30 area, expected to hold for renewed upside test.
GBP/USD
Resistance at 1.9890/00, 1.9850 and 1.9900. Support at 1.9770 and 1.9730/40.
USD/JPY
Trade confined within a 3-week triangle pattern with rebound from 102.73 low back to test the 100-day MA, currently at 104.40. Break over this will see scope for return to 104.69 then the 105.25, triangle top. Support now at 103.64 and 103.45, hold above the latter to keep bull bias in play.
EUR/JPY
Clearance over the 163.00/10 resistance extends the recovery from the 158.60 low and target 163.90 next. Beyond this eye retest of the trendline from the Jul 07 high, now at 164.50, then the 164.98 Apr peak. The 163.00/10 area now initial support ahead of 162.26/50 area seen sustaining the bull tone.
AUD/USD
Bulls on hold as setback from the .9651/55 high see bear engulfing candle weighing. Resistance now at .9615/20 area and unless regained see risk for a deeper drop ahead. Below the .9544 low see support coming in at the .9510 to .9480 area.
