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The dollar was on the back foot on Friday after an overnight slide as investors tread with caution ahead of U.S. inflation data next week, with worries over an economic slowdown and the pace of the Federal Reserve's rate hikes hitting sentiment.

The dollar index, which measures the U.S. currency against six major peers, was at 103.21, having dropped to as low as 102.63 in the previous session. The index is set to end the week with a small gain, its second straight positive week and a run it has not had since October.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits increased more than expected last week, but remained at levels consistent with a tight labour market.

The euro was down 0.07% to $1.0729., while the sterling was last trading at $1.2114, off 0.07% on the day.

The Japanese yen weakened 0.12% to 131.74 per dollar. Japan's government is planning to present the new Bank of Japan governor nominee and two deputy governor nominees to parliament on Feb. 14, Reuters reported on Thursday.

OCBC's currency strategist Christopher Wong said the foreign exchange market is likely to trade sideways on Friday in the absence of key data and Federal Reserve speakers, putting the focus on the inflation data due next week.

"The broad picture is the Fed doing policy calibration... but for the near term there is caution given recent Fed speakers and how disinflation trend may be bumpy."

Last week, the Fed raised interest rates by 25 basis points and said it was seeing signs of disinflation but a blockbuster jobs report rattled investors as they feared policymakers may remain hawkish for longer.

Fed Chair Powell in his speech this week reiterated his belief that disinflation was underway.

With inflation data due next week, focus has been on the litany of other Fed speakers, with Richmond Fed President Thomas Barkin adding to the policy rhetoric.

Barkin said on Thursday tight monetary policy was "unequivocally" slowing the U.S. economy, allowing the Fed to move "more deliberately" with any further interest rate increases.

OCBC's Wong said there are two sets of inflation reports between now and the next Fed meeting, noting that the central bank has stressed it will be even more data dependent.

"If you do see disinflation trend in the U.S. showing any signs of slowing even if it is temporary, then risk sentiment could come under pressure and the dollar may find further support."

However, Wong cautioned, that if the disinflation trend proves to be entrenched then softness in the dollar will likely resume.