updated 12/10/2004 4:53:42 PM ET 2004-12-10T21:53:42

The U.S. dollar recovered further ground against the euro and the Japanese yen Friday, making its third consecutive day of gains as traders pulled back from weeks of pushing the currency to new lows.

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The euro was quoted at $1.3231 in late New York trading, down from $1.3321 late Thursday. The currency had dropped as low as $1.3141 earlier in European trading — more than 3 cents off its all-time high, reached Tuesday, of $1.3470.

“We are seeing a clear correction of the euro against the dollar,” said Christoph Mueller, an economist at DZ Bank in Frankfurt. “People were expecting it to climb above $1.35 and that didn’t happen.”

The dollar also posted new gains against the Japanese yen Friday, reaching as high as 106.19 yen before easing to 105.14 late in New York — up from 104.50 late Thursday.

Over the past week, the dollar has gained about 3 percent against the yen and about 1.6 percent against the euro.

Concern over the U.S. trade and budget deficits had powered the euro to a series of new peaks in recent weeks. The 12-nation currency has shot up from around $1.20 in September.

However, traders were squaring positions ahead of next week’s U.S. Federal Reserve meeting, which is expected to boost interest rates for the fifth time this year, Mueller said. He argued that the euro could drop further by the end of the year, to between $1.2930 and $1.30.

The British pound was quoted at $1.9147 in late New York trading, down from $1.9275. The dollar rose as well to 1.1604 Swiss francs, up from 1.1493, and to 1.2257 Canadian dollars, up from 1.2215.

“Corrective dollar purchases will likely last for some more time. The dollar might rise to around 106 yen and $1.30 (to the euro) during this correction process,” said Masaki Fukui, senior vice president of foreign exchange at Mizuho Corporate Bank in Tokyo. “Hedge fund players want to lock in profits (by buying back dollars) before the Christmas and New Year holidays.”

The U.S. currency got a lift this week from weaker-than-expected economic data in Japan, which stoked concerns that the country’s recovery is slowing, and from a U.S. Energy Department report that U.S. stocks of crude and heating oil rose more than expected last month.

The currency also has benefited from the perception that the Federal Reserve will continue to raise U.S. interest rates, while rate hikes are on hold elsewhere.

The central banks of Britain, Sweden, South Korea, Chile, South Africa and New Zealand all left their benchmark lending rates steady Thursday, while their counterparts in Canada and Australia stood pat earlier in the week.

Higher U.S. interest rates make U.S. bonds more attractive to investors, thereby supporting the dollar. Economists expect the Fed to boost its key rate by a quarter percentage point next week to 2.25 percent — a move that would take it above the European Central Bank’s main refinancing rate, which has stood at 2 percent since June 2003.

A weak dollar can help the U.S. economy, at least in the short term, by making American products cheaper for buyers abroad. European officials and executives worry the strong euro could hurt their economic recovery by making the continent’s exports more costly abroad.

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