LONDON, April 12 (Reuters) - The euro dropped to its lowest level in five months on Friday after the European Central Bank signalled it could soon cut rates even with a hot U.S. economy likely forcing the Federal Reserve to hold fire until later in the year.
The dollar's rally across the board pushed the Japanese yen to a new 34-year low, leaving investors vigilant for signs of intervention from Tokyo officials.
The euro dropped to $1.0644 and was last down 0.67%, just above that level. It was on track to have fallen 1.5% since Monday, its biggest weekly drop since September 2022.
A hot U.S. inflation print on Wednesday caused investors to rapidly rein in their bets on Fed rate cuts this year, moving the estimated start date from June to September.
But on Thursday the ECB signalled it was still likely to start cutting rates in the summer, given that inflation has fallen more sharply in the single-currency bloc.
"The comments that we've had from ECB officials are that June is still on the cards and maybe more moves after that," said Jane Foley, head of FX strategy at lender Rabobank.
"They seem to be acknowledging that there will be a divergence from the Fed and I think that was reassurance for speculators this morning ... hence the move in the euro."
Foley added that a lower euro was not necessarily a concern for European policymakers, potentially helping exporters in Germany, where growth has been weak.
The dollar index , which tracks the currency against six peers, was last up 0.59% at 105.89, after hitting a five-month high of 105.94. It has jumped 1.5% this week, the biggest five-day rally in 1-1/2 months.
The difference in interest rate expectations has pushed the gap between U.S. bond yields and German euro zone benchmark yields to the highest since 2019, making U.S. bonds more attractive and boosting the dollar.
Britain's pound was trading at its lowest since mid-November, another victim of dollar strength, down 0.68% at $1.2469.
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The strong dollar kept yen under pressure, with the U.S. currency rising to its highest since mid-1990 on Friday at 153.39 yen before cooling slightly to 153.26, trading flat on the day.
The threat of currency intervention by Japanese authorities appeared to keep the yen steadier than other currencies on Friday, after Finance Minister Shunichi Suzuki said: "If there are excessive moves, we will respond appropriately without ruling out any options."
The Japanese currency was set for a weekly decline of more than 1% and has slumped some 8% since the start of the year as Japanese interest rates have remained far lower than those in the U.S.
"They have to support the yen, it's in freefall," said Tony Sycamore, a market analyst at IG. "So there has to be some measures soon. The question is at what level and at what time do they decide to put some money down."
China's yuan was little changed after data that showed March exports contracted sharply, while imports also unexpectedly shrank, both undershooting market forecasts by big margins.
The yuan has fallen to its lowest since November at around 7.238 to the dollar as the economy has struggled to regain momentum and U.S. growth has remained strong.
Elsewhere, the dollar also gained sharply against Sweden's crown after data showed Swedish inflation slowed more than expected in March, bolstering hopes that the central bank will be cutting interest rates soon.
The dollar was last up 1.04% at 10.83 crowns, a five-month high.
Reporting by Harry Robertson; Additional reporting by Anna Pruchnicka in London and Rae Wee in Singapore; Editing by Stephen Coates, Jamie Freed, Angus MacSwan and Kevin Liffey
