The dollar hit a fresh two-month high on Friday and was set for a fifth consecutive week of gains in its longest winning streak for 15 months, buoyed by demand for safer assets on worries over China's economy and bets U.S. interest rates will stay high.
The People's Bank of China (PBOC) set a much stronger-than-expected daily fixing, lifting the yuan from a 9-month low hit on Thursday.
The yuan weakened against the dollar to 7.3027 in offshore trading, bouncing back from Thursday's nine-month lows, after the PBOC set the official mid-point at 7.2006, more than 1,000 pips stronger than Reuters' estimate.
China's economic troubles have deepened, with property developer China Evergrande seeking Chapter 15 protection in a U.S. bankruptcy court. Concerns are also growing over default risks in its shadow banking sector.
"People are getting a little concerned with some of the statistics we've seen out of China," said Joseph Trevisani, senior analyst at FXStreet.com.
"When you get a sector that appears to be as overextended as the Chinese property sector, especially the retail and commercial sector, that really has a drag on the economy," he said.
China's securities regulator unveiled a package of measures aimed at reviving a sinking stock market, but investors said they may fail to boost confidence if the economy remains sluggish.
Beijing has so far disappointed with stimulus, while the PBOC cut rates earlier this week in a surprise move that widened the yield gap against the U.S., rendering the yuan even more vulnerable to decline.
"High yields and growing risks in China suggest the balance of risks is moderately tilted to the upside for the dollar," said Francesco Pesole, FX strategist at ING.
The U.S. dollar index, which measures the currency against six peers, edged 0.019% lower at 103.360, after touching a new two-month high of 103.680 earlier in the session. For the week, it is set to gain 0.49%.
Minutes from the Federal Reserve's last meeting showed this week that most members of the rate-setting committee continued to see "significant upside risks to inflation". Strong economic data this week, particularly retail sales, also bolstered the case for additional tightening.
INTERVENTION RISK
The recent depreciation of the yen kept traders on edge against the risk of intervention by Japanese authorities.
The Japanese yen strengthened 0.42% versus the greenback at 145.22 per dollar after reaching a nine-month low of 146.56 on Thursday.
"When things go south in China, traditionally or historically there's been a move into the yen, which would strengthen the yen, but that's not been the case this time," said Trevisani.
In autumn of last year, the dollar's surge beyond 145 triggered the first yen buying intervention from Japanese authorities in a generation.
The Australian dollar, which often trades as a proxy for China, rose 0.08% to $0.641, after hitting a nine-month low of $0.6365 on Thursday.
Elsewhere, sterling fell 0.07% to $1.2739 after British retailers reported a bigger-than-expected drop in sales in July. The euro edged 0.06% higher at $1.0877, after touching on Thursday a six-week low of $1.0856.
Meanwhile, the world's biggest cryptocurrency, bitcoin, slipped 1.74% to $26,179 after dipping to a fresh two-month low at $26,172, adding to a more than 7% plunge on Thursday, as a wave of risk-off sentiment grips world markets.
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