Japanese 1000-yen banknotes and Chinese 100-yuan banknotes are seen in a picture illustration, in Beijing, China, January 21, 2016.
Japanese 1000-yen banknotes and Chinese 100-yuan banknotes are seen in a picture illustration, in Beijing, China, January 21, 2016. Reuters / Jason Lee

The euro edged lower on Friday after European Central Bank officials sent mixed policy signals, while expectations of a 50 basis point rate hike from the Federal Reserve supported the U.S. dollar which briefly hit a new 25-month high.

ECB President Christine Lagarde struck a dovish tone by saying the central bank might need to cut its growth outlook a day after ECB dove Luis de Guindos joined some policymakers in calling for an early end of the bank's asset buying scheme coupled with a rate rise in July.

Those mixed signals contrasted with Fed Chair Jerome Powell's clear message on Thursday that a half-point interest rate increase "will be on the table" when U.S. central bank meets on May 3-4.

"To convince the market in the long term, all ECB members have to pull together. There will likely be occasional swings, but these will lead back to USD strength," Moritz Paysen, forex and rate adviser at Berenberg, said in a research note.

Monetary policy outlook is the main subject for currency markets as interest rate paths influence currencies' relative performance.

"The euro rose yesterday on reports that several ECB members were open to a rate hike in July, but Lagarde's comments continued to be non-committal," Matthew Ryan, senior market analyst at Ebury said.

"Frankly, we think the ECB risks falling quite significantly behind the curve," he added.

Friday's PMI data showed a sharp increase in euro zone service sector activity, while manufacturers struggled.

Against the U.S. dollar, the euro fell 0.1% to $1.0822, while the dollar index was up 0.2% at 100.84, after hitting its highest since March 2020 at 101.06.

Investors are waiting for Sunday's run-off of French presidential elections between incumbent Emmanuel Macron and far-right challenger Marine Le Pen, with the latest polls showing Macron winning with 55% of the votes.

Le Pen's win could provoke tensions with European allies and weigh on the euro, analysts said.

Sterling fell against the dollar to its lowest since November 2020 after sales data and recent Bank of England comments signalled a possible slowdown in the expected monetary policy tightening path.

"(BoE Governor Andrew) Bailey appeared cautious about raising interest rates and more concerned than the market expected about the risk of a possible recession and a slowdown in the labour market," Ebury's Ryan argued.

"Sterling is another currency on which we keep a close eye, and we may have to update our view on the downside," he added.

Commodity currencies are in negative territory, and oil prices extended losses on Friday, burdened by the prospect of interest rate hikes, weaker global growth and COVID-19 lockdowns in China hurting demand.

The Aussie and Kiwi dollars each dropped about 0.8% to $0.731 and $0.688, respectively, while the Norwegian crown fell by 0.2% to 8.928 per dollar.

The Chinese offshore yuan fell 0.9% to a fresh 12-month low of 6.548 yuan per dollar in London trade and looked set for its worst week in more than 2-1/2 years.

Market participants wondered if this week's fall was a policy response to counter the economic slowdown.

Deutsche Bank analysts said COVID-19 remained the most significant downside risk to China's near-term growth outlook, and "the Chinese yuan will likely face depreciation pressures in the next few quarters."

The Japanese yen was flat against the dollar at 129.37 but still within striking distance of its weakest level since April 2002, 129.43, which was hit on Wednesday as the central bank stuck to its ultra-easy monetary policy.