The dollar index <.DXY>, which measures the greenback against a basket of six other currencies, was down 0.56 percent at 96.107, on pace for its worst daily decline in nearly a month.
"You had the dollar bought aggressively over the past few months when investors were risk-averse and were seeking safety in the greenback," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"Investors are covering shorts into the last two weeks of summer and unwinding positions," she said.
Escalating tensions on trade between the United States and some of its largest trading partners had driven traders to sell emerging market currencies and take to the safety of the U.S. currency.
Next week's lower-level trade talks between China and the United States offer some hope of easing some of those tensions.
U.S. stocks extended gains on Friday and risk sentiment improved following a Wall Street Journal report on potential progress in easing trade tensions between the United States and China.
Ebbing concerns over the fallout from the Turkish lira's recent slide also helped strengthen the euro against the dollar.
"There was considerable risk aversion through the early part of the week with fears of Turkish contagion weighing on risk assets and that seems to have reversed somewhat here," said Karl Schamotta, a strategist at Cambridge Global Payments in Toronto.
On Friday, the Turkish lira
The euro
The Japanese yen
The Canadian dollar
The greenback fell 0.53 percent against the Mexican peso
(Reporting by Saqib Iqbal Ahmed; Editing by Frances Kerry and Jonathan Oatis)
By Saqib Iqbal Ahmed