NEW YORK (Reuters) - The euro rose to a three-week high against the dollar on Friday after three straight days of losses while the Australian dollar stabilized from its recent plunge as concerns over a slowdown in China and the euro zone eased slightly.
The dollar slipped to a three-week low versus the euro in the overnight session and plumbed a two-week trough against a basket of currencies .DXY.
The dollar remains supported by an improving economic landscape in the United States that contrasts starkly with other countries across the Atlantic that are either teetering on the brink of a recession or are actually in one.
U.S. new home sales fell 1.6 percent last months, but a rise in house prices to their highest in eight months backed the view that the sector is on a stable path to recovery.
"This could probably be position-squaring in euro/dollar after the selling we had seen the last few days," said Brian Kim, currency strategist, at Royal Bank of Scotland in Stamford, Connecticut.
"There has really been no bad news out of Europe overnight, so people I think are just preparing for next week's European finance ministers' meeting where they will discuss increasing the euro zone bailout fund."
Overall, worries about faltering global growth in the euro zone and China, which had hit stocks and riskier currencies a day earlier, eased off slightly, tempering demand for safer bets such as the dollar and the yen.
The relationship between risk appetite and the dollar has become more complicated, according to Chris Fernandes, vice president, senior foreign exchange advisor for the capital markets division, at Bank of the West in San Ramon, California.
"Whereas in the past the dollar would tend to fall as risk appetite was rising, the dollar is now benefiting from pro-risk developments, as U.S. economic data has generally bested expectations recently," he said.
The recent dollar rally, however, has been tempered by the prospect of the Federal Reserve launching a third round of quantitative easing, which is still on the table, said Fernandes, who helps oversee almost $10 billion in assets under management.
The greenback has gained 6.8 percent against the yen since the start of this year, while the euro has jumped 9.5 percent versus the Japanese currency, with gains picking up after the Bank of Japan surprisingly eased policy by announcing more quantitative easing in February.
If the Fed unleashes quantitative easing, that would be negative for the dollar, as it is tantamount to printing money and dilutes its value.
The euro last traded at $1.3268, up 0.5 percent, retreating from a three-week high of $1.3293, but up from Thursday's low of $1.3133. It is on track for a second consecutive weekly gain.
A key level of resistance for the currency pair is $1.33 and a break of that level would likely move it up towards $1.3500.
"I believe we may be in for a bit of range-trading right now in the major currency pairs, with the EUR/USD moving between $1.3000-1.3500, and the USD/JPY having a bit more upside, looking at 82.00-85.00," said Bank of the West's Fernandes.
The greenback was down 0.5 percent at 82.140 yen.
Euro zone finance ministers are moving closer to agreeing a combined rescue fund of around 700 billion euros ($924 billion) in Copenhagen next week and anything higher would probably be too ambitious, euro zone diplomats said on Friday.
Fernandes said a larger euro zone rescue fund would go a long way toward reassuring the markets that a viable firewall is in place should Portugal, Italy or Spain continue to struggle.
The Australian dollar, meanwhile, was up 0.4 percent at US$1.0424 after hitting a two-month low of US$1.0336 on Thursday.