A budget warning from Germany's finance minister pressured the euro Friday, while the dollar gained ground versus most major rivals.
German Finance Minister Peer Steinbrueck warned that the euro could suffer if members of the single-currency area fail to respect the European Union's stability and growth pact.
The agreement requires governments to keep budget deficits below 3% of gross domestic product except in extreme circumstances.
"Germany, as a member of the E.U., has a massive interest in the credibility of the stability and growth pact, which as you know is not taken so seriously by some," Steinbrueck said in a speech to parliament in Berlin, according to Reuters.
"If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability," he said.
The euro extended losses after the comments, breaking through important technical support around $1.3410 before trimming losses.
"I think the market does want to push the dollar higher," said Daragh Maher, currency strategist at Calyon Bank. The greenback's recent selloff has shown signs of faltering.
Traders may be cautious about chasing the U.S. currency higher ahead of next Thursday's summit of leaders from the Group of 20 nations in London, Maher said.
Indeed, China's questioning of the dollar's role as the world's reserve currency could keep a lid on the dollar's gains ahead of the G20 gathering, wrote strategists at Commerzbank in Frankfurt.
The dollar index a measure of the greenback against a trade-weighted basket of rival currencies, rose 0.5% to trade at 84.424.
The euro was down 0.8% at $1.3422 after dipping as low as $1.3365 in the wake of Steinbrueck's remarks.
The British pound extended losses after the Office for National Statistics said the national recession deepened even more than previously thought in the fourth quarter of 2008.
The ONS revised down GDP figures to show a 1.6% quarterly contraction in gross domestic product in the final three months of the year, the steepest fall since 1980. GDP was previously estimated to have contracted by 1.5%.
Compared to the final quarter of 2007, GDP was down 2%, compared to an earlier estimate of 1.9%.
The British pound fell 1% versus the dollar to trade at $1.4313, while the euro rose 0.3% versus sterling to 93.75 pence.
Japan's core consumer prices were flat for a second straight month in February, official data showed Friday. The figures, however, did little to dispel fears that the world's second largest economy might slip into a deflationary spiral. See full story.
The dollar slipped 0.8% versus the Japanese currency to 98 yen, while the euro fell 1.8% to change hands at 131.20 yen.
The yen was boosted by buying related to the end of the Japanese fiscal year and the repatriation of yen flows, said strategists at Lloyds TSB.
