The dollar rose against most major currencies on Friday, recovering from a five-month low, as traders exited short positions after two straight days of selling in the wake of the Federal Reserve's cautious view on global market developments.
The dollar index .DXY, which measures the greenback against six major currencies, was up 0.4 percent but analysts said doubt remained that the U.S. currency would regain its footing in the near term.
It was down by just over 1 percent for the week, marking the third straight week of losses for the index.
The dollar rose 0.3 percent to 111.75 yen JPY= on Friday, moving further from a 17-month low on Thursday of 110.65. For the week, the dollar shed nearly 2 percent against the yen, its steepest fall aga inst the Japanese currency in five weeks.
UBS lowered its short-term forecasts for dollar-yen, moving its three- and six-month targets lower.
"With the Fed reaffirming its caution in hiking rates, we expect a more gradual recovery of the USDJPY pair," the UBS analysts said in the note.
The euro retreated from a five-week high of $1.1342 EUR=, falling 0.45 percent against the dollar to $1.1265. It was up just over 1 percent for the week.
"We obviously had this very, very strong reaction after the Fed," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.
As for Friday's action, it was largely "just a squaring of positions at the end of the week," Merk added. "It's Friday. That's the biggest driver here."
The dollar also managed to rebound from earlier lows against a number of emerging market currencies on Friday, after falling in earlier trading.
The dollar rose against the oil-linked Mexican peso MXN= and Russian ruble RUB=, gaining 0.2 percent and 0.25 percent respectively. The dollar gained 0.1 percent against the Colombian COP= peso.
Despite Friday's gains, the dollar was down for the week against all three currencies and remained at or near lows for the year.
The potential of further dollar weakness, along with more accommodative moves from the European Central Bank and Bank of Japan, which both hold negative interest rates, has been a boon for emerging markets so far this year, said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York.
A weaker dollar benefits emerging market currencies because it lowers the price of commodities like oil, coffee and metals, increasing those countries' profits from exports.
(Reporting by Dion Rabouin; Editing by Andrea Ricci)
