The dollar had its best week in a month against its major rivals on Friday as the global reserve currency held its ground amid a sell-off in riskier assets across markets.

Investor sentiment has deteriorated in recent days due to weaker economic data, runaway inflation and fears over the pace of policy tightening by the US Federal Reserve.

European stock markets opened lower in Friday morning trading, following the trend set the previous day in Asia and Wall Street.

The dollar index, which tracks the dollar against six major currencies, fell 0.1 per cent to 95.655 for the day, but was on track for a weekly gain of 0.5 per cent, its best result since mid-December.

Currencies considered riskier, including the Australian and New Zealand dollars, lost ground, while currencies considered safe haven, such as the Japanese yen and Swiss franc, strengthened.

"The strength of the US dollar today certainly looks more like the pattern you would expect in a typical period of no risk," said currency analysts at MUFG.

"It was inevitable that if stock markets continued to fall, this more normal G10 FX pattern would emerge."

The Australian dollar and kiwi are down more than 0.5 per cent against the dollar, most recently at $0.71860 and $0.67100.

In cryptocurrencies, bitcoin also fell, falling 6% to $38,250, its lowest level since August.

The Swiss franc strengthened 0.4% to 0.91350 francs per dollar and the yen added 0.4% to 113.625 yen per dollar. The yen gained 0.1% last time out after losing momentum.

Poor UK retail sales added to the recent spate of weaker economic data. Sales fell 3.7% in December as consumers made most of their Christmas shopping early and many stayed home due to a variant of the Omicron coronavirus.

The pound fell 0.2% against the dollar to $1.35635 and as much as 0.5% against the euro to 83.61 pence per euro.

The dollar fell on Friday as US Treasury bond yields fell after a recent surge triggered by expectations that the Federal Reserve will tighten monetary policy at a faster rate than expected.

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Markets are estimating as many as four rate hikes this year, starting in March, and expect the Fed to start cutting its balance sheet by $8 trillion-plus within a few months. The US central bank will meet next week to determine the timing of the policy tightening.

While the prospect of multiple rate hikes should support the dollar, the index remains unchanged on a year-to-date basis.

"You would think that higher interest rates would lead to a stronger dollar. But if you are told that rates are about to rise and that balance sheets will shrink from July, why buy now. Just wait and then move to a higher interest rate structure," he said. Mike Kelly, global head of multi-asset at PineBridge Investments, said.

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