The dollar held at a five-week low and gold headed for its best month in over 1-1/2 years on Friday, after a report that the U.S. Federal Reserve will next week underline its intention to keep interest rates low for a long time.
Moves by Fed officials to soothe concerns about its stimulus withdrawal plans have seen the dollar tumble this month as financial markets have bounced back strongly from June's mild bout of panic.
Setting the greenback on its latest fall was a Wall Street Journal report that the Fed may debate tweaking its forward guidance message to hammer home its signal that it will not be raising rates any time soon.
Against a basket of currencies <.DXY> it was down 0.4 percent as mid-morning selling pushed it to a fresh 5-week low of 81.579, while gold, often viewed as a hedge against Fed money-printing, consolidated its 10 percent rise this month.
The dollar's slide began on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the bank would start reducing stimulus and focus is now on next week's two-day meeting that ends on Wednesday.
"We could see more squaring of long dollar positions (ahead of the Fed meeting) keeping the downward pressure on the dollar," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The softer dollar left the euro at a five-week high and eyeing $1.33, while a flurry of merger activity in the media sector not enough to fend off the currency's pressure on European shares <.FTEU3> as early gains turned to minor falls.
Falls of 0.2 percent on London's FTSE <.FTSE> to 0.5 percent on Frankfurt's DAX <.GDAXI> left the pan-regional FTSEurofirst 300 <.FTEU3> and EURO STOXX 600 <.STOXX> facing the prospect of their first weekly drop in over a month.
Nevertheless, it was a milestone day for Europe, marking one year since ECB President Mario Draghi's "Whatever it takes" speech that turned the tide in the euro zone debt crisis.
Italian and Spanish government bonds were slightly lower, but it was otherwise a quiet day for debt markets that last year were in panic mode amid fears the euro could implode. <GVD/EUR>
Most euro zone periphery bonds yields have dropped by at least a third since Draghi's move but it is euro zone bank shares that have been the biggest winners.
The STOXX 600 euro zone bank index <.SX7E> is up 56 percent and France's Credit Agricole (>> CREDIT AGRICOLE) and Spain's Bankinter (>> Bankinter SA) have surged nearly 150 percent, while Italy's UniCredit (>> UniCredit SpA) has risen 74 percent.
"Draghi's speech was a real game changer. Investors' perception of the euro zone dramatically changed, and many people stopped shorting Europe. The systemic fears about Europe's debt crisis are gone," Pierre-Yves Gauthier, head of strategy at AlphaValue, in Paris.
The 0.2 percent dip in European shares added to the earlier 3 percent drop in Tokyo's Nikkei <.N225> to leave world stocks <.MIWO00000PUS> on course for a flat end to what has otherwise been their strongest month in almost two years.
Wall Street was expected to see falls of around 0.3 percent in the S&P 500 and Dow Jones when trading resumes.
With both the Fed and the European Central Bank meeting next week, plus some significant political events in Europe, BNP Paribas economist Ken Wattret said investors were likely to remain cautious.
"You look at the equity markets and the data in the U.S. and Europe has been good yet we are flat, so that probably tells you that we have had a good run and there is a bit of a pause going on," he said.
Gold had also started to sag by 1030 GMT. It edged back to $1,327.5 an ounce but this month's 10 percent jump has been its best run since January 2012, albeit from a near three-year low. <GOL/>
Elsewhere in commodity markets, Copper prices eased 0.5 percent to just below $7,000 a tonne. They had snapped a five-day winning run on Thursday, on concerns that a slowing Chinese economy may dent demand from the world's top consumer.
Brent crude prices also dipped 0.5 percent to around $107.15 a barrel.
"We have a shift in sentiment towards demand concerns following Chinese economic data this week," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.
"Oil ought to be benefiting from the weaker dollar and strengthening U.S. economy, but that is not the theme today."
(Additional reporting Blaise Robinson in Paris and Jessica Mortimer and Christopher Johnson in London; Editing by Toby Chopra)
By Marc Jones