At a conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too-low inflation and interest rates.
The dollar dropped before rebounding after a New York Fed representative subsequently said Williams' comments were not about immediate policy direction.
Williams has "reassured markets that his comments were academic and not about immediate policy changes and the dollar has modestly recovered as a result," said Joshua Tadbir, corporate hedging manager at Western Union Business Solutions.
Investors are now pricing in a 24.5% chance of a 50-point cut in U.S. rates later this month, according to CME Group's FedWatch tool, easing off the 60.2% probability hit on Thursday. The dollar has held up reasonably well as investors bet other central banks also will ease policy.
The dollar remains sensitive to any Fed news "as traders are positioned for at least three rate cuts by year-end, including the 25-basis point cut that is fully priced into the market this month. Should these probabilities change, as a result of the Fed potentially indicating a one-and-done attitude this month, then the dollar could rapidly appreciate as the futures market repositions," said Tadbir.
The dollar index <.DXY>, which hit a two-week low of 96.648 on Thursday, was 0.39% higher at 97.168.
The euro fell against the rebounding dollar on Friday and hit a two-year low versus the Swiss franc, as investors ramped up bets for a European Central Bank interest rate cut as early as next week.
Money markets are pricing in a roughly 55% chance of a 10-basis point rate cut next week, versus a 40% chance earlier in the week, according to data from Refinitiv's Eikon.
Not all analysts were convinced. Marvin Loh, senior global macro strategist at State Street Global Markets, said he believed the ECB would wait to cut rates until the Fed had done so. What's more, he noted, the bank may wait on making any significant changes in policy until incoming ECB chief Christine Lagarde has been installed.
The euro was 0.51% lower at $1.122.
Against the Swiss franc it touched a two-year low of 1.102 francs per euro, down 0.42% on the day. The franc, viewed as a safe haven, has benefited as investors grow nervous about the euro zone economic outlook.
Graphic: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh
(Reporting by Kate Duguid and Tommy Wilkes; Editing by Dan Grebler and Jonathan Oatis)
By Kate Duguid