The euro fell on Friday after lackluster results in an Italian bond auction renewed worries about the euro zone peripheral economies and offset strong German growth data.
The U.S. dollar headed for its best weekly performance since early 2009 against a basket of currencies after concerns about the U.S. and global economic outlook prompted investors to dump riskier assets and seek safety in the greenback.
Subtle fears that the problems in Europe have not evaporated were highlighted well this week by the focus on the weaker than expected Italian bond auction, said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
Today's (economic) releases were positive for euro, she said. The inability to rally on good news is never a good sign.
In early New York trading, the euro was down 0.1 percent at $1.2814 EUR=, having risen to a session high of $1.2906, according to Reuters data. It was on track to fall 3.6 percent against the dollar on the week, its biggest drop since May.
Losses in the euro accelerated after the currency fell below $1.2820, triggering stop loss orders.
Underscoring concerns about peripheral economies, the spread between Spanish and benchmark German 10-year government bonds widened to 172 basis points, the highest since July 19. The spread between 10-year Greek and German bonds went out to its widest since late June.
Earlier, the euro had risen after data showed Germany's economy grew more than expected in the second quarter.
Growth for the entire euro zone rose 1.0 percent in the second quarter, but some peripheral economies were struggling, highlighting the two-speed nature of the euro zone's recovery.
The ICE Futures U.S. dollar index, a gauge of the greenback's performance against six major currencies, was slightly higher at 82.670.DXY. On the week, it was tracking a rise of 2.88 percent, its best since January, 2009.
The greenback briefly lost some ground after U.S. data showing a rebound in retail sales and higher consumer prices soothed some fears about the U.S. recovery.
There was a sigh of relief in the currency market when traders realized that retail sales last month was not abysmal. This has led to a rebound in the euro, pound and dollar/yen, said Kathy Lien, director of currency research at GFT in New York.
Against the yen, the dollar rose as high as 86.21 yen, according to Reuters data, before retreating to 85.85 yen JPY=, down 0.1 percent. Resistance was seen ahead of stops at 86.30/50 yen.
(Additional reporting by Anirban Nag in London) (Editing by Theodore d'Addlisio)