The dollar fell alongside U.S. Treasury yields on Friday after a surprise downside in U.S. economic data this week reinforced bets that the Federal Reserve will cut interest rates this year.

The week started with a mix of market drivers, led by a U.S.-China trade truce that pushed the dollar higher, although the euphoria soon wore off and the currency traded sideways.

Most of the action in the foreign exchange market came from the dollar's ​​moves against the South Korean won, where it fell sharply for a second straight day on news that Washington and Seoul were discussing a dollar/won market earlier this month.

The moves were reminiscent of a similar episode in the Taiwanese dollar earlier this month.

The dollar was last trading 0.4% lower at 1,390 won. "Speculation is again mounting that President Trump favors a weaker dollar, potentially pressuring other governments to let their currencies strengthen in trade negotiations," said George Vessey, head of FX and macro strategy at Convera.

"Asian currencies' weakness against the dollar has long been seen as a boon for regional exporters, a stance the government is keen to counter."

In broader markets, the dollar struggled to regain its footing after an overnight drop following data showing U.S. producer prices unexpectedly fell in April.

The PPI figures came after weak consumer price readings earlier in the week, bolstering bets the Fed is likely to cut interest rates at least twice this year.

The euro rose 0.26% to $1.2130 while the pound gained 0.14% to $1.3325.

Against a basket of currencies, the dollar fell 0.2% to 100.57, though it was on track for a slight weekly gain thanks to a sharp 1.3% gain on Monday.

Markets are now pricing in a Fed rate cut of around 57 basis points in December following Thursday's data, up from 49 basis points previously.

The 10-year U.S. Treasury yield extended a 7 basis point decline from overnight and was last slightly lower at 4.4217%. The two-year yield fell to 3.9467%.

In a closely watched speech on Thursday, Fed Chair Jerome Powell said policymakers felt they needed to reconsider key elements around employment and inflation in their current approach to monetary policy. (Newsmaker23)

Source: Reuters