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The dollar rebounded strongly on Friday, but remained on track for its biggest weekly loss since late May after weak U.S. economic data saw some paring of bets for the size of an expected Federal Reserve interest rate increase next week.

The euro retreated further from a more-than-two-week high reached on Thursday, when the European Central Bank raised borrowing costs in its first rate hike since 2011, but kept the terminal rate unchanged and provided few specifics of a new tool aimed at taming peripheral nation bond yields.

The dollar index - which measures the greenback against six major peers, with the euro the most heavily weighted - jumped 0.35% to 106.98, following a 0.36% slide on Thursday.

For the week, it remains down 0.95%, the biggest decline since May 29 and its first losing week in four.

Europe's shared currency dropped 0.44% to $1.0187, retreating further from Thursday's knee-jerk peak of $1.0279 following a larger-than-telegraphed half-point hike from the ECB.

While the new bond purchase programme, called the Transmission Protection Instrument, would ostensibly be triggered by the selloff in Italy's debt amid the collapse of the government there, sources told Reuters the ECB didn't expect to use it imminently.

"The details, conditionality and what would justify activation was vague and did little to inspire confidence in light of the Italian political situation," Tapas Strickland, a markets economist at National Australia Bank, wrote in a note.

The dollar came under additional pressure overnight, with U.S. Treasury yields also retreating, after data showed a slump in factory activity and a rise in applications for unemployment benefits, signs that the economy is already feeling the effects of aggressive Fed policy tightening, potentially leaving it with less to do in future.

Traders now put 82.5% odds on the Federal Open Market Committee raising rates by 75 basis points on July 27, with 17.5% probability of a full-point hike.

"It seems likely that this will be the defining moment for markets in what has been a tumultuous month," Jeffrey Halley, OANDA's senior market analyst for Asia-Pacific, wrote in a note.

"Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in U.S. yields overnight is setting up USD/JPY for a serious culling of long positions."

Japan's currency, which is particularly sensitive to changes in U.S. yields, headed for its first winning week since late May, although the dollar's rebound on Friday tempered those gains.

The dollar rebounded 0.43% to 137.925 yen, after sliding 0.67% overnight and pulling further away from the 24-year high at 139.38 reached last week. Since last Friday, it is down 0.46%.

Elsewhere, sterling slid 0.35% to $1.1962, trimming its gain for the week to 0.8%, still the most since late May.

The Aussie slumped 0.47% to $0.69035, paring a weekly advance to 1.63%, though that would still be its best showing since May 20.