The dollar headed for its biggest weekly drop in five months on Friday as the prospect of rate cuts from the Federal Reserve against a tough line from central banks in Europe on monetary policy fed weekly gains in the euro and the pound.

In an action-packed week for central banks, traders found more clarity on when interest rate cuts were likely after Federal Reserve Chair Jerome Powell said at Wednesday's meeting that the tightening of monetary policy is likely over, with a discussion of cuts coming "into view".

Preliminary readings of business activity in France and Germany on Friday showed an unexpected slowdown in the euro zone's two largest economies this month, which sent the euro down by as much as 0.4% to a session low of $1.0946. It was last at $1.0954, still up 2% this week.

Sterling eased 0.2% to $1.2745, having surged 1.1% to a four-month high of $1.2793 on Thursday after the BoE's hawkish tilt.

Meanwhile, the Japanese yen strengthened 0.1% to 141.70 per dollar, having risen 0.7% to a four-and-a-half month high of 140.95 on Thursday.

The yen is up 2% this week, set for a fifth straight week of gains against the dollar, its longest such stretch since mid-2020.

Source : Reuters